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

Good morning, everyone. I'd like to start by acknowledging the traditional custodians of the land on which we meet today, which for me in Sydney is the Gadigal people of the Eora Nation. I also acknowledge the traditional custodians of country throughout Australia and the places from which our participants join us on this webinar and their connections to land, sea and community. I pay my respects to the elders, past and present, and extend that respect to Aboriginal and Torres Strait Islanders peoples here today. Welcome to the investor webinar for Australian Clinical Labs FY '22 Financial Results Presentation. My name is Eleanor Padman, and I am the company's Secretary at ACL. I'm joined today on this webinar by our Group CEO and Executive Director, Melinda McGrath; and our CFO, James Davison; and our National Marketing Director, Joe Geran. Today's webinar will run for approximately an hour and will be recorded. A copy of the recording will be made available on ACL's website after the event. By choosing to attend, you are providing your consent to participate in the recording. During the webinar, you will hear questions from the Melinda and from James, and then we will have time for Q&A. [Operator Instructions] Once we move to Q&A, we will focus on the more frequently asked questions, and we'll try to get through as many as possible in the time available. I'd now like to hand over to our group CEO, Melinda McGrath.

Thanks, Ellie. Thanks, Ellie. Good morning, and welcome to Australian Clinical Labs first full year 2022 results presentation. I'm going to go through some highlights and then pass on to James to do the financials. And then I'll continue with strategy and outlook. Clinical Labs achieved strong results in financial year '22, with an enhanced strategic position, improved operational performance, and we continue to invest in our ESG targets. From a financial point of view, revenue increased 48% to $995 million, NPAT increased by 101% to $178 million, non-COVID revenue increased by 8% to $556 million, EBIT margins increased to 26.8%, up from 20.8% last year due to strong operational management in an environment of a fee cut and increases in consumable costs. Cash flow price of financing activities increased by 76% to $171 million. Net debt, excluding lease liabilities, improved by $90.5 million. We also strengthened our strategic position. We acquired Medlab in December 2021 and now have operations in all mainland Australian states. We increased our market share from 13% to 16%. Excluding acquisitions and non-Medicare work, we grew our non-COVID testing revenue at 3.6% faster than market. We expect to benefit as non-COVID testing rebounds. We continue to expand our service lines with growth in clinical trials testing, IVF testing and genetic testing. We continue to focus on operational improvements with the completion of the SunDoctors integration and the integration of Medlab's main New South Wales facility into the Clinical Labs facility. Concurrently, we completed a significant Oracle upgrade to facilitate future growth and digitization. We continued our values-focused approach to investing towards ESG targets. And we declared a full year fully franked dividend of $0.53 per share, $0.12 interim dividend and $0.41 fully franked final dividend. Our pro forma net debt at 30 June post-payment of dividend of $56 million remains lower than the $93 million of pro forma net debt at the time of our IPO. Next slide, please, Joe. This slide provides a nice snapshot of the business today. I point out the increase in the number of collection centers, the continued investment in our unified laboratory systems and the historic growth trend of the industry. Thanks, Joe, next slide. ESG is central to our operations and strategy, and we've done a lot of work this year. Firstly, we've measured our Scope 1 and 2 emissions at 1.4 kilograms of carbon dioxide per episode. Our second round of measurement is underway, and we look forward to seeing the results of all of our activities to address our highest emissions. Some of our actions are listed on this slide. By far, the greatest cause of emissions in our business is the electricity used by the laboratories. In addition, we're buying only hybrid cars to replace our fleet, and the automated route tracker is fully up and running, enabling us to manage the cars more efficiently and minimizing their environmental impact. And just as an aside, it was really useful having this tool with the Medlab acquisition as we were able to reduce the duplication between the 2 businesses and manage their fairly large fleet of cars in an automated manner almost from day 1. We've pushed our digitization with the referral process, with 97% of COVID testing being paperless referrals, and 24% of non-COVID referrals are paperless. Our lost time injury frequency rate has improved to 3.6%. And we've recommenced our Women in Leadership mentoring program, which was on hold due to COVID as, in most cases, these leaders were the ones leading the frontline response to COVID. All Board Committees have been reviewed, and the Board has reviewed its performance. Next slide, thanks, Joe. Our response to COVID has been essential to Australia's national response. I'm really proud and humbled by the work of the teams at all levels, has started being amazing, working in hail, rain and shine and even collecting samples, not only COVID samples, in flood environments, on boats and on bikes. Led by a pathologist and scientist, they've managed in a complex environment working 24/7. And again, many of them have canceled their own leave for the second year in a row to enable Australians to be safe and travel at Christmas and New Year. A major thanks to our specialist microbiologists who have not only led the pandemic response and ensured best-practice patient care, but also provided expert opinion and advice to their fellow medical practitioners as the pandemic developed over the last 2 years. I would like to take this opportunity to, again, sincerely thank our teams for their outstanding patient focus, teamwork and their commitment. I'll pass it over to James now.

Thanks, Melinda. Next slide, Joe. Yes, so firstly, just to clarify, that all comparisons to prior year are against pro forma FY '21, with the reconciliation between the reported and pro forma numbers in the appendix. As is clear from the numbers, FY '22 was a strong year financially for us. Revenue was almost $1 billion, up from $674 million last year, EBITDA of $373 million, up from $231 million last year, and EBIT of $267 million, up from $141 million last year. There are a few key takeaways I'd like to highlight in the numbers. Excluding the Medlab-related integration, transaction and one-off costs, EBITDA and EBIT would have been over $7 million higher than reported. The full year results only include [ 6 and a bit ] months of Medlab, which, on a full year basis, would have added around another $40 million of non-COVID revenue. Our non-COVID revenue was broadly flat on prior year, excluding acquisitions, which was around 3.5% better than the comparable market, which puts us in a great position as market growth returns. The non-COVID average fee increased by over 5% for the year, with further upside as histology and private inpatient volumes are still around pre-COVID FY '19 levels. In terms of cost as a percentage of revenue, operating costs, excluding consumables and one-offs of 41%, were down from 48% last year, with labor decreasing from 37% to 32% and other costs, excluding one-offs, decreasing from 11% to 9%. Consumables for the year increased from 18% to 21% driven by the second half increase in COVID consumables. Labor efficiency as measured by episodes per work hour improved 13% on last year. The EBIT margin increased from 21% to 27%. And if we were to exclude head office and listing costs, the operating business delivered an EBIT margin of 30%. NPAT for the year of $178 million was $90 million or 101% up on prior year. And if we were to exclude the transaction, integration and one-offs, NPAT would have been around $184.5 million. In terms of the second half results, there are a couple of key points to consider. Firstly, the market growth for the second half, ex COVID, was materially softer than the first half, being down around 6%, including private hospital and histology work, which was down almost 9%. Integration of the Medlab -- New South Wales Medlab and Bella Vista laboratories only occurred in mid-June, with the bulk of the synergies to flow through from July onwards and be largely achieved by the end of this calendar year. The increase in AASB 16 depreciation, from $43 million in the first half to $52 million in the second half, was wholly attributable to the 300-odd new Medlab ACCs we acquired as part of the acquisition. And we saw significant growth in COVID testing against the second half last year, which was up over 130%. However, the contribution from COVID testing was materially lower due to the 15% fee decrease in January and increased consumable costs due to no longer pooling, which essentially meant that we spent the same on consumer books in the second half as we did in the first half despite the revenue almost halving. Next slide, please, Joe. This chart shows the breakdown of revenue on a half year basis split between Vic, non-Vic and COVID. Second half '22 shows that ACL is becoming much more diversified in terms of its revenue geography. Non-Vic revenue increased to $176 million from $142 million last year due to the Medlab acquisition, which will add around $40 million per half of non-COVID revenue across New South Wales and Queensland, which is strategically important for ACL as it has given us scale in New South Wales and a profitable base to grow from in Queensland. In terms of non-COVID Medicare revenue, ACL materially outperformed against the market. Excluding acquisitions, ACL's revenue growth was minus 0.7% versus the comparable market, excluding Queensland and Tasmania, which was down over 4%. The outperformance against market was more pronounced in the non-Vic states, but all states increased share, which will provide a further tailwind as market growth returns. As Melinda will discuss further when we get to Slide 14, there are fundamental long-term drivers that support non-COVID revenue growth. And lastly, COVID volumes remain volatile and hard to predict. Next slide, please, Joe. ACL is very focused on converting its earnings into cash flows. For the year, ACL generated $171 million of cash before financing and investing, which was broadly in line with NPAT. The conversion of cash EBITDA, which is essentially AASB 117 EBITDA to operating cash flow was over 96%. CapEx for the year was $21 million and included $11 million of one-off-type capital expenditure related to the integration of the New South Wales Medlab business into the Bella Vista laboratory and further capacity expansion, the Oracle upgrade and the Queensland lab expansion. Excluding these items, CapEx was in line with prior year and a normal level of BAU go-forward spend. Financing investing of $180 million comprised debt repayment of $100 million, the interim dividend of $24 million, payment for acquisitions of $51 million and $5 million for the purchase of shares for the key employee retention plan. The difference in cash flow between the first half and second half was just the correction of working capital, with debt as normalizing. Next slide, please, Joe. ACL has a very strong balance sheet. The business is now net cash positive by $26 million, representing a $91 million improvement over FY '21, which was a net debt position of $64 million. The main driver of the balance sheet movement was the acquisition of Medlab, primarily across debtors, right-of-use assets and associated lease liabilities, goodwill and deferred consideration. Excluding AASB 16, associated right-of-use assets and lease liabilities, net current assets increased by $60 million or almost 30% on prior year. The final dividend will increase pro forma net debt to around $56 million on the closing June cash balance, which is materially less than 1x EBITDA and the $93 million of debt as at the time of IPO. Thanks, Joe. Back to Melinda.

Okay. Thanks, James. Just on to Slide 12, thanks, Joe. We've continued to strengthen our strategic position through our focus on our customers, the upgrade of our lab information system and operational investment and geographic expansion. We've continued to enhance our patient offering with further improvements and expansion of our clinical trials offerings, productive health testing and investment in precision genetic medicine. We continue to invest in our integrated national platform, investing in robotic analyzers and upgrading the underlying database of our lab information system. Our collection centers numbers increased to 1,336. And we've integrated both the Medlab New South Wales business into our -- and Queensland business into our facilities and now -- are now connected onto our one laboratory information system. And we've increased our market share from 13% to 16%. Next slide, please, Joe. We've continued to invest in operational improvements and innovations throughout the year. And I'm just going to highlight a few points here. Firstly, the Medlab acquisition and integration, this acquisition provides us with a strong footprint in New South Wales to complement our Clinical Labs footprint and our SunDoctors acquisition. The New South Wales team has done a magnificent job, in the face of really tight time lines, to create greater capacity in our lab and then to exit Medlab facilities. Under the leadership of Chris Brownlow and the outstanding New South Wales management team, they've retained revenue and have integrated the lab operations smoothly. And I might just add that this is 12 months before we planned. Over the next 6 months, they will refine their operations, and we expect a run rate from the Medlab acquisition in excess of $20 million EBIT impact into financial year '23. The Queensland team, under the leadership of Helen Watson, has faced floods and resulting significant disruption. Yet they have already integrated the 3 businesses, with SunDoctors included, and moved operations onto our lab information system, ensuring that they're nationally connected. And they're really looking forward to driving service and growth in Queensland, with an integrated SunDoctors, Medlab and Clinical Labs offering. Secondly, and by necessity due to their skills, the same teams during the integration work were also managing the COVID response. Managing the COVID service to patients is really difficult, given the huge peaks and troughs and the additional separate high-cost infrastructure that is quite out of the ordinary for our business, with drive-throughs and traffic management and the like, resource scarcity and the tight turnaround time expectations. Thirdly, our IT team. At exactly the same time as the Medlab cutover and integration, Omicron, floods in Queensland and New South Wales, the team completed a lab information upgrade to Oracle that was very complex. It involved 135 team and subject matter experts and 18 months of project planning. This LIS change can't be performed like a parallel run to minimize risk. It required checking and recoding of more than 1.5 million lines of code before cutover to minimize the impact on service. And just as I mentioned, the LIS subject matter experts were also dealing with the integration, Omicron, outbreak of floods and as frontline managers, managing the response to all of these. It's an amazing effort by those involved. And under the leadership of Sean Jackson and Erik Swayn, I congratulate them on a really well risk-managed complex change project. Next slide, please, Joe. The timing of the rebound in non-COVID testing will be a key driver of our outlook. It's really hard to forecast in the short term, but more predictable in the longer term as the market is expected to return to historic trends. Prior to the pandemic, COVID -- pathology revenue grew at 5.6% since 2000 driven by long-term drivers, population growth, aging and new tests. The COVID pandemic basically stopped growth in non-COVID testing revenue due to doctor access issues, lockdowns, decreased level of testing for non-COVID disease and social factors. As the pandemic decreases, there should be a rebound in non-COVID testing revenue. And if testing revenue follows historic growth levels, the non-COVID testing revenue would be around $450 million higher and a 16% market share that implies we have a $70 million deficit in non-COVID testing compared with historical trends. But the timing of the rebound of revenue is key to our forecast into the future. Just on the next slide, please, Joe. The level of COVID testing revenue will be a key driver also, and it's hard to forecast as well and it's driven by some of the factors listed on this slide. Responding over the next year will be operationally really tricky as we dismantle a separate COVID infrastructure and move activity into normal BAU without affecting patient access. And this patient access issue is a really big issue for the community. We believe COVID-19 has become endemic, and testing will continue and become more akin to seasonal flu. Next slide, please, Joe. We have a well-defined growth strategy that we've been consistently driving for the last 7 years. I've mentioned the underlying organic growth trend. But I've also mentioned some of our achievements in the 4 other pillars of our strategy. We've made strategic acquisitions that we've integrated ahead of time and with more benefits than we originally anticipated. Once again, all of our major labs are on our unified lab information system, which is the key to enabling us to drive improvements in service offering and efficiency and benchmarking to best practice to drive best practice efficiency and service. The integrated businesses will stabilize this half. And as we refine our processes, we're excited to be looking forward to driving growth through our enhanced footprints that we've achieved through our acquisitions. And just on to the next slide, please, Joe. ACL has declared a $0.41 per share dividend, final dividend, fully franked, which will bring the total financial year '22 dividend to $0.53 per share fully franked, which represents 60% of financial year NPAT. This slide outlines the relevant dates, but I'd like to note that this is post the material acquisition of Medlab and leaves us with a pro forma 30th of June '22 net debt position post-dividend of $56.1 million. This compares with a net debt of $93 million at the time of the IPO last year. And based on the 5-day VWAP share price of $5.36 as of yesterday, of the 8th of August, the dividend yield for financial year '22 was 10%. We will not, at this stage, provide guidance for financial year '23. The final results will be driven in part by the rebound of COVID and non-COVID testing, which is very hard to predict. But Clinical Labs management will continue to focus on efficiently and effectively meeting the testing needs of the community for both COVID and non-COVID, integrating and enhancing the value of our 2021 SunDoctors and Medlab acquisitions, operational efficiency and flexibility to ensure appropriate margin generation, investing in meeting value-creating ESG targets. And our dividend guidance remains at 50% to 70% of financial year '23 NPAT. Thanks, Joe, next slide. Just to summarize the highlights of financial year '22. We had a continued strong financial and operational performance with an NPAT of $178 million and an EBIT margin of 26.8%. We increased our Medicare market share from 13% to 16%. We have a strong balance sheet, with a net cash position of $26 million. We demonstrated our expertise in acquiring and integrating businesses, which we've done since the inception of Clinical Labs. We're well positioned to benefit from the rebound in non-COVID revenue as Australia comes out of the pandemic. We have a highly experienced management team with a performance-based culture, and I'd really like to take this opportunity to thank them for their teamwork and their focus on results for doctors, patients and shareholders and their engaging leadership of our teams on the ground. And lastly, we announced for financial year '22 a fully franked dividend of $0.53 per share, with $0.12 already paid and $0.41 to be paid as per the dates noted. Thanks, Ellie. I'll pause now for any questions.

Great, thank you. So I can see we've had quite a few questions come in and also hands raised from some of the analysts that cover us. So Lyanne Harrison, from Bank of America, as you were the quickest to raise your hand, I'm just going to take you off mute to allow you to ask your questions. Go ahead, Lyanne. Okay.

Lyanne?

Lyanne, can you hear me?

[ No ].

All right. I might try Chris, and I'll come back to Lyanne, maybe there's something wrong with your system. Chris, go ahead. Chris Cooper.

Can you hear me?

Yes, we can hear you. Yes.

Yes, Chris.

So first one, if you don't mind, is on the cash costs. I think on consumables, in particular, I'd expected that to be a little bit more variable. I know there was less pooling that was possible in the second half of the fiscal year compared to the first. But given the revenues did slow sequentially, I was hoping for a bit more control in that line. Can you just give us an update on where we should be thinking about this stabilizing as we think about fiscal '23 and beyond? If we're in more benign or perhaps less acute way of just, I should say, of the pandemic, is there scope for more pooling and therefore the consumables cost as a ratio of sales to be a bit more like the first half than the second? Or is the second half now a further reflection of where we are in the stage of this business?

Yes. I think just the first in our minds now, Chris, is that the shift in the percentage was highly attributable to COVID. So the consumables for the base business have remained consistent with where they were. And so then, the impact from the COVID and from the pooling, the way the testing is working at the moment end up being less screening and more symptomatic means that with the positive rates as they've been how they are, then it's more likely that it will continue at a similar level to what we saw in the second half going forward.

Okay. And labor costs, James as well, I know you had hoped for some degree of flex in the business if we were entering a slower period of revenue growth. I think that is obviously what we saw in the second half in terms of the revenue dynamic, but labor was sort of sticky downwards, I think, it's fair to say. How much of that was inflationary pressures versus headcount? And at this point, should we still be thinking about some downward flex on the labor cost line?

Yes, absolutely. So obviously, there's a -- it's a fine balancing act between obviously keeping all the facilities open, the volatility of COVID testing, and so trying to make any changes that we need to make in a very controlled manner. So what we've certainly seen was that we had a quite elevated testing through April and May. June was significantly softer than those 2 months. And then July has picked up a little bit on where June was. So we're certainly going through a process of rationalizing and limiting the number of sites that we have opened, and we will certainly expect to see some downward flex on COVID-related labor as we move forward.

Chris, the other thing on labor is we've got Medlab live in there as well. So there's still additional duplication in Medlab...

And there's still the synergies coming out from Medlab, correct.

Yes.

Yes. Okay. Helpful. And just 2 more quick ones, if you don't mind me squeezing these in. So the first one is actually on noncash, so D&A. Just on my math, we're annualizing here post-Medlab around about $115 million, $116 million. Assuming no further M&A for the near term, is that the sort of run rate we should be thinking about forecasting for this business in terms of noncash D&A over the coming sort of 2, 3 years?

Yes. So AASB 16 depreciation would expect to be half 2 annualized. So there was the step-up in half 2 due to the Medlab acquisition. And then traditional depreciation, yes, it's probably about right. So there's probably a bit over $100 million of AASB 16 depreciation and around $12 million to $13 million of non-AASB 16.

And I hope an expectation at this stage is EBITDA is still being sort of loosely targeted at greater than 27% sustainable going forward.

Yes, absolutely, once -- while we're still absolutely confident with that number as some of the volume starts to return.

All right. So I might move to Craig Wong-Pan now from RBC Capital Markets. Craig, could you ask now your questions...

Just on CapEx. I mean there was a bit of still CapEx that you said came through this period. Could you just talk about what we could expect in FY '23 for CapEx?

Excluding capacity expansion-related CapEx or anything, like just for our routine CapEx, is around about that $10 million to $11 million mark, the same as '21 and the same as '22, excluding the one-off-type items.

And is there any kind of a one-off CapEx that we might see for Medlab or any other labs that you might be looking to expand?

There's plans underway or looking at redeveloping or doing a new lab in WA, but most of that will be amortized by a lease -- into a lease, so, nonmaterial CapEx, no.

Okay. And then the next question, just on integration costs. Could you talk about whether we should expect any of those integration costs in FY '23? Or is that going to be -- is that pretty much done now for -- in FY '22?

The only thing that's probably left to come through is there might be some one-off-type costs in relation to rightsizing labor. But the bulk of the spend has largely been incurred.

Okay. And then last question. I know some of your competitors have been offering a panel COVID flu and RSV test. I mean is that something that you're offering or might look to offer as well?

Well, it's what the doctor orders. So what we do, what the referrers request and what's in line with best medical practice. So if, obviously, and as what we explained before, you can [ request our pathologist to cover into ] a flu if it's required. But generally speaking, we do what's ordered and mostly in line with best practice.

Okay. I think, I guess, what we're seeing is in some of the drive-throughs that, I guess, when people turn up to get a COVID test, they were automatically getting like a flu and RSV test as well. Is that something that you do in your drive-throughs?

Well, once again, so the process of turning out for the state-funded drive-through is shifting and is quite different to what it was. And so to be able to go for Medicare, you require a doctor referral, and so it's really whatever -- what the right referral is.

Okay. So I might move to Gretel Janu now from Crédit Suisse. Gretel, go ahead.

So firstly, just in terms of -- from a revenue perspective, so you have mentioned that you are gaining share. I just want a little bit more color around this. Is this just small hospital work or other share gains to the community as well ex Medlab?

Yes, hospital workers, especially in the second half, was quite tight. So we had some growth, and obviously, it's with our strong heritage in providing private hospital work beneficial. But now, it was across the board. So when we strip out COVID-related testing and the commercial work, we took share across the board.

Understood. And then just in terms of Medlab synergies, so how much of the synergies was actually in that second half relative to what we should expect in first half '23 of that $20 million EBIT run rate that you expect by the end of this year?

Yes, hardly any. So the New South Wales, so the bulk with the one of the $15 million out of synergies on top of the run rate was all related to the New South Wales integration, which only occurred in the, I think, week 3 of June. So very few synergies, if any, really in last financial year, and we see most of that flowing through in the first half of this financial year or the remainder of calendar year.

And then just last question. So balance sheet, very strong net cash. What's the outlook from an M&A perspective?

Melinda?

We're always looking, Gretel, for opportunities to grow our business. So that's always something that we're scanning the environment for. We're obviously really keen to grow what we've just acquired. It's giving us a fantastic footprint, not just in Queensland and New South Wales, but the SunDoctors business is -- have got a huge national potential as well. So really keen to cement what we've got and further grow the acquisitions we've just made, but always looking for opportunities to further grow our business and do bolt-ons and integrate. Of course, the same attributes as our current business. The thing with pathology is you can get extra episodes without having to employ extra professional staff for every episode. So that's the kind of business that we are keen on looking at.

So I'm going to move next to Tom Godfrey at MST Financial. Tom, go ahead, please.

Can you hear me okay?

Yes. You're on.