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

Good morning, everyone. I would like to start by acknowledging the traditional custodians of the land on which we meet today, which for me in the city of 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 for this virtual AGM and their connections to land, sea and community. I pay my respects to their elders, past and present, and extend that respect to Aboriginal and Torres Strait Islander Peoples here today. This is ACL's second AGM, and it gives me great pleasure to welcome you all meeting today. My name is Michael Alscher, and I have the privilege of being the Chair of your Board. I've been reformed by our company Secretary that we have a quorum present, and I now declare the meeting open. Before we begin with today's agenda, I would like to introduce my fellow Board members who are present at the AGM today. Here in Sydney, I'm joined by the Chair of our Remuneration and Nominations Committee, Mr. Andrew Dutton, the Chair of our Audit Committee, Mr. Mark Haberlin; and also Mr. Nathanial Thomson. Our Company Secretary, Mrs. Eleanor Padman, also joining us virtually from Sydney; as is the company's legal adviser, Mr. John Williamson-Noble from Gilbert and Tobin. Joining us virtually from Melbourne, Chief Executive Officer and Executive Director, Ms. Melinda McGrath; and Fellow Director, Dr. Leanne Rowe; as well as Michael Stanford, the Chair of our Risk Committee. They are joined by Mr. James Davidson, our CFO. Also in Melbourne is ACL's auditor, Mr. Stephen Whitchurch, from Pitcher Partners. Stephen will be available to answer questions that shareholders may have in relation to the 2022 financial statements and the conduct of the 2022 audit. I will now take a moment to explain the interactive features of the webcast platform that we are using today. A virtual meeting online guide was sent to shareholders with the notice of meeting, and I will now run through the key features. To vote, you will need to register by clicking on the Get a Voting Card button and providing your security holder number and post code. If you're an appointed proxy, please enter the proxy number via link in the Proxy Details section. Once you have registered, your voting card will appear with the resolutions to be voted on by shareholders during today's meeting. You may need to use the scroll bar to view all resolutions. On your voting card, you will see an option to enter a full vote or partial vote. To vote, you can click For, Against or Abstain. If you wish to submit a partial vote, please enter the number of votes you wish to lodge from the total you see displayed for each resolution. Once you've finished voting on all resolutions, please submit the vote. At the end of the meeting, a countdown timer will appear and voting will end 5 minutes after the close of the meeting. Please ensure you get your votes in on time. To ask a question, shareholders can simply click Ask a Question. Depending on the volume of questions, we'll focus on answering the most frequently asked questions. I would also ask that you confine your questions and comments to the business of the AGM. If there is a technical issue that impacts the webcast, we ask for your patience while we work to address it as quickly as we can. If a technical issue results in me being unable to continue to chair today's meeting for a period of time, Mr. Mark Haberlin is appointed Chair in my place, and will continue with the meeting until the technical issues are resolved. The notice of meeting for the AGM was made available to all shareholders, and I propose that it be taken as read. The notice of meeting can be found on our website under the Investor Center tab and there's also a link on the AGM platform which you can download it from there. Today, I will begin with my Chair's address, and then I'll invite our CEO and Executive Director, Ms. Melinda McGrath, to provide an overview of the FY '22 financial and operational achievements and FY '23 trading to date. We'll then move to the formal part of the meeting. As well as the formal tabling of ACL's 2022 financial statements and auditor's report, there are 3 items of ordinary business. We will take questions as we address each item of business. Before I begin, I would like to acknowledge our recent announcement to the ASX that Dr. Michael Stanford, who retires from the Board, with his retirement to take effect just prior to the conclusion of today's meeting. Michael had a close association with ACL prior to its IPO, having been the group CEO of St John of God Health Care for 16 years and then a Non-Executive Director of Clinical Labs Proprietary Limited from 2016 to '19, following its acquisition of St John of God Health Care's Pathology business. Since joining the Board of ACL in April 2021, Michael has acted as Chair of the Risk Committee and has played a significant role in overseeing seeing ACL's risk management framework. Michael's medical background as a former specialist and public health medicine, has made him a most valuable member of the Board, and I'd like to take this opportunity to thank Michael for his meaningful contribution to the Board over the last 18 months. We wish him all the very best as he continues to pursue his non-executive career. Financial '22 marks the first full financial year of ACL being a publicly listed company. And I'm pleased to say it represents the strongest June in its history despite a backdrop of market and sector volatility. It has also been an incredibly challenging year, and I'd like to emphasize the efforts of all staff who have delivered this outstanding performance. Pathology Services are an essential component of ensuring that all Australians receive timely diagnosis and treatment as well as improved health outcomes. On behalf of the Board, we are proud of the important critical role ACL continues to play in health care in Australia. I'm pleased to report that in FY '22, ACL delivered more than 12.6 million pathology episodes generating $996 million of revenue. ACL also continued its continuous improvement program, which led to earnings before interest and tax, reaching an impressive 27% Other notable achievements during FY '22 includes a successful execution of the Medlab acquisition, which has delivered financial synergies greater than originally anticipated and will be fully integrated the ACL business by the end of the calendar year. The strong metrics achieved for FY '22 were only possible due to the enormous effort right across the entire organization, often under very challenging circumstances to meet the needs of our communities, often with a personal impact on our people. Providing outstanding patient care is one of ACL's core values and has been inspiring to see striving to achieve this every day. Whilst our focus on operational performance remains strong, so too does ACL's commitment to delivering on our ESG targets to ensure that we will deliver sustainable value to shareholders, patients and the wider health care. In 2021, ACL published its first ESG report that set out a number of objectives connected to 19 key areas over a multiyear horizon. In the past 12 months, ACL has focused on Scope 1 and Scope 2 emissions generating a baseline measurement so we can introduce appropriate targets and process changes to meaningfully reduce these emissions. Changes have already commenced with hybrid career vehicles being introduced as a pilot program in Victoria, along with specially developed route planning software deployed efficient travel and reduce emissions resulting from our logistics systems. This program will be rolled out across the country in FY '23. We have also been working with landlords to have solar panels and LED lighting installed in laboratories. ACL's employees are some of the most talented community in the industry. And the company's investing in additional training, communication and education to improve safety, performance and engagement. Importantly, as ACL acquires and integrates new businesses, it has been able to create a safer workplace for its employees and patients with a LTIFR, meaning lost time injury frequency rate, of 3.91 per million work hours, down from 7.5 same time last year, representing a significant improvement. We note that as we acquire other businesses, this measure improves as we apply our systems in the newly acquired business. As a Board, we've continued to mature our corporate governance framework to ensure alignment with the ASX principles. We held our first board performance valuation this year and have made some changes to our committee structure. We will also use the vacancy left by Michael Stanford is retirement to improve the diversity of the Board. Now that ACL has been admitted into the ASX 300, it's interesting to note that not only do we have an incredibly capable and dynamic CEO, Melinda is only one of 19 female CEOs in the ASX 300. At ACL, we have a very diverse workforce, the more majority of the whom [indiscernible] has to be acknowledged that we have an important role to play in removing structural barriers to progress and gender equity, and we will continue to address this in FY '23 and beyond. Our leadership team is focused on this as well with specifically tailored mentoring and development programs. The past 12 months have been a testament to more than 5,400 people who work at ACL. As the COVID-19 pandemic continued creating significant waves of infection, including over another Christmas period, ACL's employees rose to the occasion yet again and responded with care and diligence in very challenging circumstances, as well as sacrificing their own family time. Our staff always maintained professionalism, ensured safe practices were followed for the benefit of patients and each other. They did this to support their communities with world-class turnaround times, so patients can get the results they needed to return to work, to travel and protect others from getting set, pathologists, scientists, collectors, lab staff, service support staff and management each made sacrifices to allow Australians to be healthy and safe. The pressure over this period was immense and our team handled the situation with a level of care, kindness and professionalism at all times, even when some of the patients expressed a level of personal frustration that amplified this difficult period. Accordingly, I'd like to take this opportunity to acknowledge and thank ACL's dedicated staff led by Melinda and her management team. To shareholders, as I say, your company has managed strongly and effectively with experience, empathy, enthusiasm and skill. Our fast commitment to each other and patient care has been outstanding. I would also like to acknowledge the excellent cooperation between ACL and state governments, state health systems and other industry leaders to service the Australian community. Finally, on behalf of the Board and ACL, I would also like to thank you, our shareholders, for your valued ongoing support. I would now like to hand over to Melinda McGrath for the CEO's year-end review. Thank you.

Thank you, Michael, and good morning to you all. I would also like to start by acknowledging the traditional owners of the lands in which we meet, which for me here today in Melbourne is the Wurundjeri and Boonwurrung peoples of the Kulin Nation. I pay my respects to their elders past and present and extend that respect to Aboriginal and Torres Strait Islander peoples here today. The last 12 months have been both challenging and rewarding. And I would first like to thank the 5,400 Australian clinical lab staff who've worked tirelessly throughout the year with passion and enthusiasm. Like every year before financial year '22 has seen both our service and our financial performance improve. And we are in a stronger position in terms of employees, management, operating position and value creation for shareholders. As a brief overview, I would quickly like to share with you the following key metrics which served to illustrate our financial year '22 performance. In financial year '22, we saw a revenue increase of 48% to $995.6 million, an increase to NPAT of 101% to $178.2 million, non-COVID revenue increase of 8% to $556.4 million, EBIT margins increased to 26.8%, up from 20.8% in financial year '21, demonstrating strong operational management in an environment of fee cuts and increased consumable costs. Cash flow prior to financing activities increased of 76% to $171.2 million. Cash EBITDA to operating cash flow conversion of 96%. Net debt, excluding lease liabilities improvement of $90.5 million, moving from a net debt position of $64.1 million to a net cash position of $26.4 million, a fully franked full year dividend of $0.53 per share. The highlights of our ESG program are outlined in our updated ESG statement. We've measured our Scope 1 and 2 emissions, pushed further on addressing our electricity usage and use of hybrid cars, improved staff safety outcomes as measured by a lost time injury frequency rate and reviewed our Board's performance and committee structures. One of our key strategic projects in financial year '22 was the acquisition and subsequent integration of Medlab Pathology a large private pathology business, both in New South Wales and Queensland. The Medlab acquisition has allowed Clinical Labs to increase its scale and footprint in these 2 key states, the first and third largest pathology markets in Australia. Meaning we now have a national footprint on the Australian mainland, allowing us access to larger nationally focused tenders, allowing us to grow market share. Operationally, Medlab is now substantially integrated into Clinical Labs, which has occurred well ahead of schedule. The synergies from the integration are already starting to flow through with run rate EBIT synergies of $20 million per annum expected to be achieved by the end of this calendar year. The project has also enabled strategic benefits for our recent entry into Queensland via consolidation of the Medlab, Clinical Labs and SunDoctors Labs in Queensland and investment in the automated laboratory in Murray.. Overall, the acquisition has added just under 300 new collection centers and approximately $80 million of non-COVID revenue. We have continued to invest in our core unified pathology information system by upgrading the underlying database to Oracle. This will support Clinical Labs focus on digitization and scalability into the future. This project involved a team of more than 130 employees over a period of 18 months and was delivered seamlessly without any disruption or downtime to our end users. This was a significant achievement, which speaks to our internal digital capabilities. I should note that this project was undertaken at the same time as our Medlab integration. And in addition, the majority of the subject matter experts were concurrently managing the Omicron outbreak. Clinical Labs' response to the COVID-19 pandemic during financial year '22 has once again been significant. We continue to play a critical role in Australia's testing process for the Australian community. Our frontline pathologists scientists for the bottoms, couriers, call centers and lab employees provide a professional service, often in incredibly challenging and complex environments, including multiple blood events where samples needed to be retrieved in boats and on bicycles. Despite being impacted by staff illness, lockdowns and travel restrictions, we continue to move work around our national network to manage the demand, particularly over the December '21 and January '22 Omicron outbreak, where many of our staff gave up their summer breaks for the second year in a row. The outlook for the next 12 months remains complex due to the inherent volatility of COVID-19 testing and the uncertainty related to the timing of a rebound in non-COVID testing. Prior to the pandemic, non-COVID outlays grew at a consistent rate of about 5.6% per annum from long-term demographic drivers. Due to frequent lockdowns, difficulties in accessing doctors for face-to-face appointments and increase seasonal respiratory illnesses as borders reopened we've seen static growth in non-COVID revenue. With underlying demographic drivers unchanged, we expect a rebound in non-COVID testing revenue as the impact of the pandemic decreases. However, this is difficult to forecast in the short term. In the long term, we expect that non-COVID-19 volumes will return to historic trends, and that COVID-19 testing will start to follow the seasonal flu. In financial year '23, we'll focus on targeted growth at an effective margin while ensuring that capital is employed well, as it has been this year with our investments in Medlab Pathology, the expansion of our Bella Vista lab and our clinical trials laboratory in Queensland. We will focus on meeting the testing needs of our communities for all testing, ensuring our response is efficient and effective and in line with clinical best practice. We will focus on flexibility and our operational efficiency program in an environment with lowered COVID revenues. And we'll continue to focus on creating sustainable value by meeting our ESG targets. This year, we target, amongst other goals, as outlined in our ESG update, further improving our admissions, growing our pipeline of female executives through our leadership program and increasing the diversity and number of female directors on their Board. We also look forward to developing a reconciliation action plan. In conclusion, I would like to thank all of our stakeholders, our 5,400 employees, our many supportive medical professionals for their support and our excellent management team. I would also like to thank the federal and state governments and state health systems with whom we've worked extremely effectively and of course, our shareholders. I would like to now provide an update on our performance for the first quarter of financial year '23. Financial year '23, we made the transition with a return to BAU as COVID testing normalized. In this first quarter of financial year '22, ACL generated $190 million in revenue. 17% of this revenue related to COVID testing. In September, COVID testing dropped quickly and represented approximately 10% revenue. In the first quarter, ACL non-COVID revenue, excluding acquisitions, has grown more than 5% to the prior comparative period, which ACL believes is faster than market growth. COVID volume continues to decline with quarter 1 revenue down 40% on the prior quarter. Over the past 6 months, COVID revenue has fallen by 63% over the preceding 6 months. And ACL has been rapidly transitioning to a post-COVID revenue environment. The integration of Medlab Pathology is progressing ahead of plan, with labs now fully integrated into our existing infrastructure. The company's current expectation is that Medlab will generate in the region of $20 million of earnings before interest and tax on a run rate basis as we exit the 2022 calendar year. Some duplicated processes and systems will remain in place to enable revenue retention through half 1 of '22. We continue to manage our CapEx appropriately, and we do not capitalize any COVID, IT and digital development costs. Further, ACL expects historical cash conversion rates to continue through the financial year '23 and financial year '24. The expectation is that financial year '23 CapEx will be normal level of CapEx and be consistent with financial year '21 CapEx in the region of $10 million, excluding growth CapEx. ACL believes that the BAU market recovery process will occur over financial year '23, as doctor availability improves, hospitals work through their backlog and nursing shortages and patients commence their normal general practice visits. The company expects BAU to improve progressively into the 2023 calendar year with financial year '24 representing a stronger growth year than '23 for BAU as the pathology sector moves to a more normalized environment free of COVID restrictions for both clinicians and patients. Thank you for your time. I'd now like to hand you back to our Chair, Michael Alscher, for the formal part of today's meeting.

Thank you, Melinda. I would now like to proceed with the formal business of the meeting. The first item of business is to table and consider the financial statements for the year ended 30 June 2022, together with the director's report and the auditor's report, which are included in our 2022 annual report, and which have been published on our website. I formally table the 2022 financial statements of ACL for the financial year ended 30 June 2022, the directors' report and the auditor's report. I will take all of these reports as read. We will now take any questions submitted via the virtual meeting platform. Are there any questions tender or for myself in relation to the company's performance or any of the matters raised by Melinda in her address.

Michael, yes, we have 1 question from Mr. Wayne Arthur. The question is as follows. You indicated that in the first quarter, non-COVID revenue grew by more than 5%. What has been the change in costs during that same period?

I might hand that question over to Melinda. Melinda, would you like to would you like to sort of explain how we've been dealing with our sort of resetting of costs over that period? We might have a technical issue. I'll answer the question. Thanks for the question. The cost base is coming down quite rapidly in regards to the infrastructure that we've built in regards to the COVID collection centers. It's a fine balance in terms of managing that cost as we're still dealing with a number of COVID requests. And as we're seeing that volume dissipate, we're taking decisions on a case-by-case basis to close our collection centers, which are purely for COVID. Our view is that pretty much the whole distribution network associated with supporting COVID testing will have been dismantled by Christmas. And we're really going through the process now of seeing an acceleration of that dismantling of that distribution. As that happens, we will jettison all that cost and really we'll probably move to a new cost base in second half of this financial year. But as far as the first half is concerned, we're just having to manage that and that interplay between falling testing and making sure that the infrastructure is still in place. But then as the fall in testing doesn't justify the infrastructure to get rid of that infrastructure. There's a bit of an interplay there. But from what we can see, certainly in the monthly accounts, there's a very strong and diligent approach by management to sort of look at how we can manage that resetting of cost base over this first half. Eli, do you have any other questions?

There are no more questions on this item, Michael.

Great. Are there any questions in respect to the 2022 financial statements for the auditor?

No, Michael, there are no questions for the auditor.

Thank you, Eli. The next item of business is the nonbinding shareholder resolution to consider the adoption of ACL's '22 Remuneration Report. The Remuneration Report is contained within the 2022 directors' report and forms part of the 2022 financial statements and reports. Are there any questions in relation to this resolution? Eli, do we have any questions?

No, Michael, we don't have any questions.