Australian Clinical Labs Limited (ACL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to ACL's First Half FY '22 Results Briefing. I'm pleased to introduce ACL's CEO and Executive Director, Melinda McGrath; and ACL's CFO, James Davison. [Operator Instructions] Over to you, Melinda.

Thanks, Davina, and good morning, everyone. Thank you for your time today as we present our first half financial year '22 results. I'll go through the highlights of the half, and then I'll pass over to James for more details on the financials. After James has spoke and I'll continue with the strategy update and outlook and then go on to questions. Davina, can you just go to Page 3, please? It's been a really challenging year, and the staff response to COVID has been really outstanding. But that's not all we've been doing. We've been continuing to implement our growth strategy. as we have been for years, and we outlined in the IPO, the base business has been growing well despite lockdowns and restrictions. And we've had 6 years of digitizing and investing in operational improvements that are demonstrating not only leverage but resilience and further opportunities. We've acquired and are underway with the integration of 2 businesses within the last 8 months. We've outperformed forecasts and guidance, the total revenue of $538 million is 62% ahead of the half last year, same half last year. The first half '22 non-COVID revenue growth was 2.8% ahead of last year returning to trend. The EBITDA of $239 million was 112% ahead of same half last year. The EBITDA margin of 44.5% was ahead of the same half last year at 34%. The EBIT of $191 million was 178% ahead of last year same half. The significant operating leverage was delivered with an EBIT margin of 35.5%, which is ahead of last year at 20.5%. And I might add that the operating leverage of the past 2 years has been on the upside as well as when testing numbers go down. So it's been very responsive. The NPAT of 130 million is 200% ahead of last year same time and ahead of the revised guidance of between $116 million and $128 million. The Medlab integration and expected synergies are running ahead of schedule. The run rate EBIT contribution is now expected to be more than $20 million by December '22. I'll talk about that a little bit more later. We've strengthened our balance sheet with net cash at December 31 of $2.8 million. and we've today declared an interim dividend of $0.12 per share. The final dividend and composition will be considered at full year based on financial performance, capital needs and corporate activity. Just on to Page 4. On to operational highlights. The successful completion of the Medlab acquisition was definitely a highlight. The final payment is circa $52 million, which is reduced from $60 million due to contracted purchase price adjustments. The majority of synergies will be achieved within 12 months with a run rate EBIT contribution of more than $20 million, which is now expected by December '22. This is an upward change from our original expectations of 18 to 24 months. We strengthened our management team prior to completion to set ourselves up for success. The SunDoctors integration is substantially complete, and we've identified new opportunities in Queensland and New South Wales for the SunDoctors, which will be in addition to the opportunities we identified on acquisition of the SunDoctors. We opened our purpose-built Brisbane lab, which is dedicated to clinical trials and clinical pathology. And we've upscaled our COVID testing to enable best practice efficiency and just noting, in December, there was an 800% increase in COVID testing just in December alone. I'll just pause there as I'd like to, on behalf of the Board, express my thanks to our staff and stakeholders for their continued support, which has allowed us to be really responsive to the pandemic over the past 2 years. At the same time, as responding to COVID, we've also delivered on our core business. We've driven operational improvements across the whole organization, and we've simultaneously completed 2 acquisitions. On to Page 5, please, Davina. I'll just go further into the Medlab acquisition. Firstly, we're really encouraged by the response we've had from our doctors and Medlab doctors, the pathologist and the staff has been really great. Medlab is a highly complementary business, which doubles our size in New South Wales to 20% of market share in Australia's largest pathology market. It accelerates our expansion into Queensland, which is the third largest market in Australia. And we've made improvements on the purchase price, as I noted earlier. With regard to the integration process, there's a strong cultural alignment between the teams and the integration is ahead of plan. Pleasingly, we've retained key personnel, including the pathologists who are among leaders in their fields. I handpicked a new management team in Queensland, who worked with me previously, and they have deep experience in pathology and have hit the ground running. The Medlab, New South Wales lab will be considered and consolidated into our Bella Vista lab by August '22. This is an important change as not only does it bring the benefits forward but it greatly derisks the change from a lab, IT and technology point of view. We're currently reviewing opportunities for our labs in Queensland. We have opportunities with the SunDoctors the Medlab and the clinical lab facilities, which will enable us to further capitalize on our Queensland strategy. And I just wanted to explain how we work when we manage these projects. We're really hands-on. My Chief Operating Officer, Anthony Friedli, is a Lean Six Sigma Black Belt, and he has a team of business improvement specialist reporting to him to drive 3 change projects. With acquisitions, we always set up a professional focused project management team to support the BAU change and drive opportunities and the synergies in accordance with our investment goals and our hurdles. We go in, we analyze, we benchmark in detail for best practice, both revenue and cost using lean principles and our experience. And I just wanted to note that our New South Wales State CEO, Chris Brownlow, has worked in pathology for 20 years and has completed 7 integration and lab redesign processes. So we know from past experience that he will do a great job of this one. We developed detailed implementation plans in accordance with the time line and we engage our staff and doctors in that process. Using this process, we've now identified opportunities to bring the synergies forward by 12 months. On a run rate basis, the EBIT contribution will be more than $20 million by December '22. We originally thought it might take 18 to 24 months. So this is really good news for the organization. Just on to Page 6, please, Davina. An update on ESG. We have a documented 2-year ESG plan. We have an executive accounted for driving the E, the S and the G, and we report progress monthly to the Board. I just wanted to highlight on this slide, this is a snapshot of our plan. our Scope 1 and 2 emissions have been reviewed by an external independent party, and we're now developing actions to address those. I'll now go over to James for a detailed view of the financials.

Thank you, Melinda. Thank you, Davina. So first of all, I just want to clarify. So all comparisons to prior corresponding period are against the pro forma 1 half '21 numbers. with the pro forma adjustments as outlined in the prospectus. And 1 half '22 is as reported with no adjustments for excluded one-offs. So to recap the headline numbers. Revenue of $538 million was up 61% on prior corresponding period. EBITDA of $239 million was up 112%, and EBIT at $191 million was up 178%. COVID revenue for the half of $271 million was up almost $200 million or nearly 270%. Pleasingly, non-COVID revenue grew 2.8% for the half. And if we exclude commercial and non-MBS revenue, which was flat, largely impacted by the public hospital sector with elective surgery restrictions. The MBS non-core revenue grew 3.5%, which compares favorably with non-COVID Medicare outlays of around minus 1.5% as calculated by Pathology Australia. We had further growth in our non-COVID average fee, which increased 4% for the half with strong growth in our private inpatient work, which was up almost 10%. We expect further upside in private inpatient and histology volumes with the market data showing that prior to bit inpatient work is down 3% and histology work is down 4% on the pre-COVID half 1 FY '20 volumes. In terms of cost for the half, consumables as a percentage of revenue remained flat at 18.4%. Labor decreased from 37.5% to 28.6% and other costs decreased from 10.3% to 8.6%. Investment in systems and processes has enabled us to further increase episodes per FTE, which were up 16% on prior corresponding period. And the results include $1.3 million worth of nonrecurring transaction costs in relation to the Medlab acquisition. NPAT the half of $130 million was 87% or 200% up on pro forma prior corresponding period. And we saw further EBIT margin improvement to 35.5% from 20.5%. Next slide, please, Davina. In terms of cash flow, so we generated operating cash flow pre-CapEx of $156 million, which was up 110% on prior corresponding period. Cash conversion for the half at 81% was impacted by a negative $37 million working capital adjustment, which is highly attributable to increased trade and other receivables, primarily in relation to the substantial increase in billing through the December period. We expect this to normalize during the second half and cash conversion to return to historic levels of 95-plus percent. CapEx was up due to additional investment in the Queensland land, which we flagged at the full year results, some additional IT spend and an expansion in our COVID capacity. Just worth noting that COVID capacity expansion is multipurpose, so will be utilized in the business, irrespective of COVID volumes for other molecular tests such as Flu, STD, Faecal, PCR and HPV. Second half CapEx is expected to be in line with historic levels around $4 million to $5 million plus some Medlab integration costs. The finance and investing activities of $120 million relates to $55 million debt repayment, the $60 million upfront payment from Medlab, and we purchased $5 million worth of shares on market for our key employee retention plan. As Melinda said, we now expect the upfront payment for Medlab to be around $52 million once we adjust for the contracted purchase price adjustments. Incorporating the revised purchase price and increased synergies on a post-synergy basis and inclusive of integration costs, the EBITDA multiple has decreased from 3.9x to 2.7x at AASB 117 and from 2.2x to 1.7x at AASB 16. And then lastly, the income tax payments for the half were in line with our ATO required percentages, which will increase during the second half based on the outperformance during the first half. Next one, please. So on to the balance sheet. So we materially strengthened the balance sheet during the half with net assets of $126 million or 154%. Cash balance increased to $47 million with the business at the half in a net cash positive position of almost $3 million, excluding lease liabilities. The debtors increase as we discussed, is just a timing issue, and we increased inventory to support the increased volume and also due to the Medlab acquisition. Right-of-use assets and corresponding lease liabilities increased due to the renewal of some long-term hospital leases and also the Medlab acquisition. The noncurrent deferred consideration relates to Medlab earn-outs. And as Melinda said, we've declared a fully franked interim dividend of $0.12, with the final dividend and composition to be considered a full year based on performance, capital needs and corporate activity. Thank you.

Thanks, James. Just on to Slide 12, please, Davina, thank you. COVID has shown us to be an organization that has invested well is stable and ready to anticipate and respond to a dynamic environment. Testing volumes have gone up and down. And as you can see from this chart, is they've been very volatile. And we've worked across geographically dispersed locations to respond to need, whether it [indiscernible] Melbourne right all across the country. This chart shows the volatility of the COVID testing. And while the numbers have fallen from the highers of December, I think people may be underestimating the underlying possibilities of COVID as an endemic disease. In addition, we do a range of viral testing as our BAU and lot of people don't realize that once the disease is endemic and we have a test for it, it becomes part of best practice medicine. For example, HIV testing, hepatitis, HPV, STD and [indiscernible] or normal -- part of normal practice as examples. Many of these tests use the same equipment as COVID as James mentioned, and some of them have been under tested in the past 2 years, and we expect to spring back. On to Slide 13. Just an overall operational update. I'm really pleased that we've continued to deliver our growth strategy while still focusing on BAU and responding to COVID. I'll highlight just a few of these achievements. We've continued to roll out our market-leading logistics and courier automation platform across geographies. This is a project that's very hard to make work. It took us 3 years to make it work. Well, we've had huge benefits from it, and we've been able boat both on the SunDoctors and Medlab courier routes to ours, which enables better service and increased efficiency. The next 3 dot points are digital enhancements will be able to apply across the whole group. We have continued investment in our lab information system to support scalability and improve functionality. And we've implemented state-of-the-art automated biochemistry tracks in Geelong and Brisbane, and they're linked to the rest of our network, which means that work can be validated anywhere in the country with out reentry and duplication. We've continued the SunDoctors integration, and we've gained back office synergies and we've identified further opportunities. We now have specialist histolabs in each Mainland state and a digital slide capacity and leading anatomical pathologist in skin and gastropathology. We built and we commissioned our clinical trials laboratory in Queensland. And I'll just remind people that we have a purpose built clinical trials laboratory, which is 3 years old, just had its anniversary in Melbourne. We're preparing to consolidate our Medlabs Urban lab into our Bella Vista Lab by August. And as mentioned, the synergies will be bought forward. And we're designing a new state-of-the-art lab in WA, which will have service efficiency and cost benefits. And just on Slide 14, please, Davina. I just wanted to highlight our resilient portfolio just at a high level. While some of our businesses were confronted with closures and restrictions, others really thrived and the reverse has been true. The business has been very complementary to each other, and it's showing in our performance. We continue to extract benefits from our unified pathology platform, which has all the instrumentation and the lab information system linked to the activities of the scientists and the pathologist. And just to note that in the past 6 years, we've effectively acquired and integrated 5 material businesses. Slide 14, please -- 15, I think, please, Davina. Those of you who have heard me speak before will recognize this slide, I've included it for those who are new to our story. We've got a well-defined plan that we've been executing since the inception of the business 6, 7 years ago. And as you can see in this half, again, we have outcomes in every part of the strategy. On to Page 16. Now to the outlook for the second half of the financial year. We anticipate that testing for COVID will continue to moderate as a response to have transitions to endemic virus. Noting that virus testing becomes part of our normal clinical practice. We anticipate a rebound in COVID testing as hospitals reopen and non-COVID testing as hospitals reopen and catch up on elective surgery after 2 years of being subdued. I noted earlier, a number of test is ordering has been depressed. There are also general wellness and preventative tests that we think will return to normal trends. These are well-known tests such as cholesterol tests, diabetes tests, PSA test, prostate test, to name a few. And we're also entering the 5-year HPV cycle we anticipate an uplift here. In addition, we think we will benefit from our focus on Queensland, where we're underway from the integration of the Medlab acquisition, which I mentioned will be 12 months -- within the next 12 months, and we'll have a run rate of more than $20 million EBIT contribution by December '22. And will benefit from our investment in clinical trials and our historic capabilities that we've made over the past 12 months. However, we do not -- we're not going to provide guidance for '22 at this time. Just on to Slide 17. Thanks Davina. Just to summarize, the drivers of clinical labs are very positive. Market growth trend is normally 4% to 6%. COVID, we believe, will become endemic. The MedLab acquisition is guide. We're targeting best practice across the business lab information system. We've got a strong balance sheet and a track record of performance. We're well positioned for growth. Our management team is performance-driven and experienced, and we've consistently demonstrated outcomes. Thank you very much. We're happy to take questions now. Thanks, Davina.

[Operator Instructions] First of all, Chris, I'll take -- we'll take your question, Chris Cooper.

Just on Medlab first, if you don't mind. I mean, just correct me if I'm wrong here, you're doubling the synergy target from 10% to 20%. You're halving the time over which they get recognized and you're ultimately paying 15% less for this business than you thought you would. What's happened in the last 3 months that's driven all of those changes?

Thanks, Chris. Yes. So the $20 million consists of their previous margin and the synergies we've identified. We've upped the synergy amount because we -- as I mentioned, we have now got our hands on the business. We're able to go into the business and see what's under the bonnet. We can -- and we started benchmarking a range of activities from revenue activities to cost activities. Obviously, during due diligence, we can't see that much information. So we've been able to just really refine that. bringing the Quantum forward is to do with us now believing we can move the work of Medlab into our current laboratory in New South Wales. That enables us to bring all of the changes forward and not have to do any much -- we do a little bit of building and redesign, but not too much. And it also derisks the business from a revenue point of view and an IT point of view and a cost point of view. So it's really to do with having a better understanding of the business now that we've actually been able to physically get more data and see what we've actually got. And the other question was bring it forward. And the price, James, do you want to just have a quick chat on the price?

Yes, sure. So as we flagged in the presentation when we applied Medlab that there were some adjustments around purchase price primarily, obviously, the standard things around lead entitlement inventory balances and the like. But there's also an adjustment for the performance of business from the first of November to completion. So with their trading performance during that period. Obviously, we didn't know what was going to be. So it was a $60 million less those purchase price adjustments.

Okay. Understood. Lease liability is probably my next one. There's a decent step up. Could you just clarify and I know you called out there in your prepared remarks, the extension of some hospital contracts. Are these -- are these being signed on similar terms to previously? Or are they new hospital contracts, can you give a little bit color there?

Existing. Their extensions of existing so in line with the like extension, just option renewals but they're longer term than they stand a sort of 3-year ACC leases. So there was a step-up for that. And then obviously, the other big step up was in relation to the Medlab acquisition.

Okay. And the desire to sign longer-term deals, is there something that's going to continue to wash through as you renew contracts over the next few years? We're going to sort of see continued step-up in lease liabilities as you go through that process?

No. It's more of a factor of, obviously, the hospital ones are generally a longer term, more secure type arrangement. So it was really just exercising options for preexisting leases. We expect that the portfolio to remain quite similar moving forward and ACC terms and conditions, not to be dissimilar to current.

Okay. And just on COVID test. So I note that you were close to 50,000 tests a day in late December. I know you don't want to be drawn on exactly how many you're going to be doing going forward. But I hear your comments on this being an endemic disease and ultimately, it will fall into face volumes. Can I ask compared to 50 tests and 50,000 a day in late December, what are you doing today and directionally, does this continue to taper down from here? Or do you see a reasonable stability at this point?

Yes. So I guess on the first question, the volumes, our market share has stayed consistent. And so the volumes that each state is currently doing is published data. So you can sort of work out that what we were doing as a percentage is not dissimilar to what it is now. There was -- the volume -- the daily volumes have certainly stabilized across the business. Whilst we expect some continued moderation moving forward, we also expect as the weather gets colder and flu and respiratory diseases start to pick up, that there will probably -- there's likely to be some increase in volumes.

Okay. As you are today, I mean one of your competitors told us yesterday that between that December peak and today, the number of tests has fallen about 75%. Is that the sort of number you're seeing as well?

Yes, not December.

And now the next question will take us from Lyanne Harrison. Lyanne, over to you.

Just wanted to understand, you have to follow up on Chris' questions there about daily volumes. I think another way to look at it is how do your volumes today compared to the daily average you saw in second half '21 where Australia had relatively low COVID case load?

I think [indiscernible] -- and there's a chart on -- was it Slide 13, 14, something like that, that's sort of showing our weekly volume. So I think it's sort of pretty clear looking at that sort of where we're at, at the moment versus all the way back really from the inception of what we started to do in the COVID testing.

Okay. And then if I could talk about the guidance that you came out with on the 21st of December last year. Obviously, there's only 10 days to go in the year, but you still managed to beat that guidance. Was that simply a factor of the storage in COVID cases late into December? Or what are other factors at play there?

Yes, the bulk of it was no one saw COVID doing what it did over those last couple of weeks of December.

Okay. And if I can move now to margins. So obviously, a significant margin expansion. As COVID volumes fall away, how do we think about balancing, obviously, volume leverage and operational efficiencies? How do we -- how should we think about margins going forward into the next half?

I'll just answer that and then throw over to you, James. Really one of the key things of our whole method of operation right from the start has been to make sure we've got a neat space over which we can grow revenue. And everything we've done right from the start, including rationalize our ACC portfolio and our hospital portfolio right back at the start was about making sure where our fixed costs were really well controlled and we had the ability to control our responsiveness to the environment, both up and down. And with COVID, for example, we have a lot of casual staff. We have staff redeployed from other areas that have been down and retrained in the organization. A lot of the sites we have are variable. So we can move our responsiveness up and down as required. So just with that framework, it's been actually part of our success to date. And one of the key success factors in my view, of our 6-year journey has been everybody in the organization at managerial level knows that the really protecting that base and then we really want the revenue to go over a low base. That's kind of the whole foundation of how we work. So James, did you want to add anything more to that?

Yes. I guess, obviously, Lyanne, for the next 6 months, it's really hard to say where margin is going to land depending on COVID what happens with the bounce back in the underlying business. surgery, elective surgery restrictions easing and the like. but we remain of the view that we've been pretty clear about historically that the underlying business once the BAU volumes normalize, is in that 26% to 27%. Obviously, there's a bit of -- going to be a little bit of upside because Medlab is going to be a bit better than what we thought. And then it really depends on what cover volume looks like moving forward.

Okay. And then final question on these. You mentioned there volumes starting to come back. And you mentioned returning to trend on the business as usual part of the business. What are you seeing today? Is there any sort of material growth as we come out of the Omicron live?

Yes. So obviously, the first part, the early part of January, when we were still dealing with the pay from [indiscernible], it was a bit softer. But the underlying business like every week is better than the week before at the moment. And as things normalize and we move out and the surgery restrictions are eased. Our expectation is that it continues to improve.

And the next question is from Craig Wong-Pan from RBC. Over to you Craig.

Just wanted to clarify on Medlab. When you said you expect EBIT to be greater than $20 million that's I guess the base business plus the synergies. How much EBIT was there when you first bought it? Because in your presentation slide on the acquisition, you provided EBITDA of $10.5 million, but not an EBIT number.

Yes, correct. So that's -- EBIT would be sort of -- well -- that was on a normalized basis with COVID, I think. So there's a few numbers that come into that. And once we normalize for COVID out and alike, probably sort of a little bit less than half.

Okay. Okay. And then just with the purchase price adjustment through November and because of the trading of during November and December. Does that give you any concerns about the future earnings of the business given trading was a bit softer in those months?

No, was strong. That's why there's a favorable purchase price adjustment. Sorry, I'm not sure -- there's obviously -- there's more to it than simply the trading result that goes into purchase price adjustments. We leave and inventory and a bunch of other things. But no, there's certainly nothing -- no concerns that we've got about the performance of the business.

Just to clarify that the contractual -- contracted arrangement allowed for the adjustment from $60 million down to $52 million. So it's actually a positive response to the...

Yes, and it's not as simple as just taking that as the performance for that 2020 period.

Okay. And then just to clarify some comments made earlier, James, about the commercial and the non-MBS segments. Were you saying that if you look at the non-COVID revenues and you exclude commercial and non-MBS tests and also hospital contracts and you were broadly flat year-on-year?

No, no, no. So what I'm saying, sorry. So non-COVID revenue grew 2.8%. If we strip out commercial and non-MBS from that number, it's 3.5% because the commercial non-MBS revenue -- and it was primarily related to the Victorian public hospitals, that was flat being impacted by the elective surgery restrictions in Victoria. So our like-for-like non-MBS COVID revenue grew 3.5% versus a market of around minus 1.5.

And next start will be Tom. Tom Gore, over to you.

Just first one for me. Just a question around balance sheet. Obviously, net cash position is nice to see for the end of the half. Maybe just some comments around capital allocation from here and any comments on your M&A pipeline?

Yes. So the Board's decided to just retain some of that cash flow flexibility in the next few months. Obviously, we're focusing on our two acquisitions that we've just made to make sure we get the benefits from those, but we're continually looking for other opportunities. The final dividend remains as per prospectus 50% to 70% of NPAT, subject to us whatever might happen in terms of corporate activity.

Okay. That's clear. And maybe just a couple on COVID testing. Can I just sort of ask how you're thinking about your sort of PCR infrastructure and cost base going forward, just in the context of what we're seeing in terms of volumes?

Yes, it's a good question. So the -- this instrumentation, we already had the instrumentation, while the test wasn't developed when COVID first started, we already had the instrumentation. It's actually a multipurpose instrument or they are actually multipurpose instruments they can do a range of virus testing, STDs, HPV, for example, and we've actually increased our capacity in case there are other variants, and we get more outbreaks. But the instrumentation can be used for a whole range of tests, including flu, I didn't mention flu, but there wasn't much flu last year either. So there's a range of tests that we expect will come back in addition to COVID. So the instruments certainly aren't not going to be underutilized. That's for sure.

And what about in terms of sort of short-term testing sites and drive-throughs and the like you start to sort of trim back the network?

The whole thing with COVID has been about being flexible and responsive, and we work really closely with the state governments and the federal government to meet what they consider the needs of the Australian population. So at the moment, we're not really going hard on that because the government still requires our responsiveness. But we are continually monitoring each site for profitability, productivity, et cetera. So it's on a site-by-site, case-by-case basis, but also with the overlaying caveat that there may be more outbreaks and the state government -- individual state governments have different requirements for us in different contractual arrangements. So there's no -- there's not a drive to close everything down. It's just our normal practice of making sure everything is as profitable as we need them to be.

Got it. I...

Sorry, James you might want to add something to that?

Yes. No, I think that's good.

That makes sense. It might be nice just sort of a comment around reimbursement, like I think -- this is a key focus for the market over the last sort of 3 or 4 months been in the context of current volumes. Has that sort of been deprioritized for lack of a better word by government? Or what's your sort of view around PCR reimbursement going forward?

Well, obviously, that's a matter for government. But as I just mentioned, we've got a lot of infrastructure that we've set up to meet the requirements of the pandemic and the government is really aware of that. Both sides of government are really aware of that. So we've been working really well with them. So I anticipate that, that will continue to occur into the future while we're meeting Australia's pandemic response needs.

And the next question is from John. John, over to you, John Deakin-Bell.

My question was just more on the shape of the underlying recovery. Obviously, there's been some deferral of pathology, but unlike elective surgery. And if you don't get a blood test, but you normally get every 6 months, you're not going to get it twice. Can you just give us your sense of how you think the underlying business might recover? And then the second thing, we just got off the Ramsey call and they're really quite cautious on the pace of elective surgery coming back mainly because of staffing issues in Australia. Just maybe give us your thoughts on a 12-month view on how you think the underlying business might look?

I'll just start, and then James, you can answer that last part of the question. Just on the Ramsey/hospitals part of the equation. That goes back to our portfolio. We're not relying on any one part of our business to perform they're complementing each other, and they seem to be very responsive up and down. So we mine part of the business is down because of elective surgery being down. Another part of the business is responding really well. So we're really pleased with how responsive and resilient the business has been overall, and that's demonstrated in the performance. We do have a very strong hospital portfolio, but obviously, from the results, it hasn't overly negatively affected our performance. We have public and private hospitals. I do understand that Ramsey will be saying that it's going to be difficult, but we're not relying on any one part of our business for our performance. We work really closely with our hospitals to try and help them to get through various aspects of their -- what they're confronted with, which are different to what we're confronted with. But generally speaking, I think we do think that once they're back to normal, even trending towards normal, we'll be following that path. Having said that, we're not overly reliant on any one part of the business. But James, do you want to add anything?

Yes. I guess your comments right for a lot of things. So obviously, if you didn't have a cholesterol test last year, you're not going to go and have 2 this year for it or whatever. But the fact remains that if you didn't have one last year or you didn't have one for the last 2 years, but there's still going to be all those people that need to have one this year and things that are being deferred, like if people that haven't had skin checks and we can see histology volumes are down 4% on pre-COVID levels like there is a significant amount of stuff that hasn't been done or was being deferred over the last 2 years that will need to be caught up on. So whether it happens in the next 6 months or 12 months or the shape that it takes is obviously incredibly hard to predict. But clearly, our view is that there will be some catch-up and then a return to more normal 4% to 6% growth once that catch-up's occurred.

And then just the other question is on the -- you called out this clinical trial business, which you've been growing. Can you just give us a sense of how big you think that opportunity is for you?

Yes. For -- we have a very strong contractual relationship with the leading player in the Phase I market. We believe the Phase I market is around $15 million to $20 million of pathology testing in Australia alone. We are growing that business to be able to do Phase II to IV. And that market is obviously greater than that. So we'll be leveraging off our -- what we've already invested in. We've got the skills and capability already to build on that I just note there's some competitors on the call. So they'll have their own figures. It's pretty hard to get a figure on what that is, the broader market, but I might just leave it there, John, to say the -- we think the Australian market is up $15 million to $20 million for Phase I alone, and we've already got a -- we're already building a large proportion of that market.

And the next to ask a question is Rod Lee. Rod, over to you. You just need to unmet.

Just a couple of quick questions. Firstly, I apologize if you did answer this earlier or already asked it. But just with regard to the $20 million run the EBIT run rate from Medlabs sort of in 12 months' time. Can I just ask, are you including an assumed level of COVID revenues in that business at that time? Or is that assuming no cover through Medlabs?

Yes, that's really just on an underlying business basis.

Fantastic. Great. Secondly, I was just interested in the decision to consolidate at Bella Vista. And I was just -- I guess there's 2 parts to this question. The first is just to check that -- you do have adequate space at Bella Vista for future expansion, given likely industry growth over time? And then the second was just out of interest to try and understand what tipped you in that direction? Because I know you were weighing up whether to go a new location, I think, sort of perhaps more centrally located or alternatively go with the Bella Vista site?

Yes. The site is adequate. We've been able to get more space. And as I mentioned now, state CEO, that's very experienced at integration and lab design and lab redevelopment. So we weighed up a few locations. This 1 really tick the boxes because it has less risk because we do not have to change the instrumentation over and the lab information system, which means our revenue risk is greatly reduced change with this greatly reduced. And we don't have to train as many staff on new instrumentation. So it's a great option. For us, it's a short-term option. We've been really successful in looking at working with partners to redevelop labs. I mentioned the WA lab is being -- we're looking at a new lab in WA, same sort of thing for New South Wales. First, we'll integrate the business, and then we'll look at what we do for future expansion. So you're right, right, we anticipate to grow a lot in New South Wales and that will be Phase II of our projects. So first phase is getting it in getting our performance right and then the guys will go on to looking at how we work into the future.

That's great. And perhaps one last one, if I may still on?

Yes.

Good. I'm just curious sort of -- we haven't had a proper influenza season for a few years. I was just wondering, historically, prepandemic, I know it fluctuates year-to-year, but what would be considered sort of a normal number of tests that you would do over the season for respiratory illness when there is influenza about? And is the Northern Hemisphere experience suggesting that we are looking at our first influenza season for some time?

Yes, I think that would be a good indication of what might happen here, especially with the Board is open. Do you want to answer the normal?

Well, yes, I sort of think normal is going to be reset anyway. Look, I think, obviously, the level of attention that people will give to respiratory type symptoms is going to be different to what we've historically seen anyway. So I'm not sure historic levels is necessarily the best benchmark of what it's going to be going forward, but we absolutely anticipate that -- well, our advice from some of our medical people that were likely to experience quite significant flu season. And I think because of where it runs at and the additional focus on it, that will be materially stronger than flu seasons we've historically seen.

Melinda there's no further questions.

Okay. On that note, we might -- will be closed, Davina?

Yes.

Okay. Thank you, everyone, for your time. I know it's a very busy time for you. So thank you for your time and attendance at our half year. Thank you.

Thank you.

Bye-bye.