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

Good morning, everyone, and welcome to the presentation on Australian Clinical Labs takeover offer for Healius Limited. On behalf of ACL, I would like to start by acknowledging the traditional custodians of the land on which we meet today, which for Melinda and I is the lands of the Gadigal people of the Eora nation. We 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. We pay our respects to the elders past and present and extend that respect to Aboriginal and Torres Strait Islander peoples here today. My name is Michael Alscher, and I'm the Chair of Australian Clinical Labs. Before I introduce Melinda McGrath, the CEO, I would like to make a few comments of my own. On behalf of the Board of ACL, we're extremely excited about the opportunity we are presenting to the respective shareholders of both companies to merge Healius with Australian Clinical Labs. The value proposition of bringing these 2 companies together is highly compelling and something that is -- genuinely rare emerges. Very rarely do you see a merger opportunity where there is considerable synergy value to be created by consolidating operations and at the same time step changing the performance that can be created in the combined business versus each business stand-alone while also improving health care outcomes. We have in Australian Clinical Labs an extremely well-run, high-performing business with a track record of success in consolidating acquisitions. And in Healius, we have a company which finds itself under pressure in its operating performance over a long period of time. Together, these companies present a materially stronger opportunity for shareholders to create value than either company has on its own. We estimate that the share value accretion potential to both groups of shareholders is greater than 90% of the current respective share price of each company. And at the same time, the merged company will be knocking on the door of the ASX 100 and be the largest commercial pathology company in Australia and one of the largest in the world. We have structured this merger proposal as a full share scrip offer so that both groups of shareholders benefit from the value creation presented by the merger. Similarly, the offer has been structured at a 0 premium to the volume-weighted average price from the date after which Healius released its first half report so that the benefits of the merger are shared on a pro rata basis. If the transaction is successful, the merger of the 2 companies will see Healius shareholders hold 68% and Australian Clinical Labs shareholders hold 32% of the shares on issue. With that said, I'd like to now hand over to Melinda McGrath to take you through the presentation in more detail.

Thank you, Michael. The Board of Australian Clinical Labs believes that the merger of Australian Clinical Labs and Healius will create Australia's largest pathology business with enhanced scale and profitability. The merged group will have a larger and more diversified earnings base. The combined business is expected to create Australia's largest pathology provider. It will have complementary networks expected to enable more efficient service delivery. They will be better positioned to pursue future organic and inorganic growth opportunities. The merged group will have material synergy potential. It's expected to unlock approximately $95 million of expected cost synergies. For reference: This is approximately 95% of Healius' financial year '23 EBIT based on analyst forecasts. Synergy delivery is expected within 4 years of completion, with more than 50% in the first 2 years. Synergies will be delivered via lab network consolidation, logistics optimization, procurement benefits, back office and support consolidation. The merger derisks Healius' operational turnaround. The management team of Australian Clinical Labs has consistently delivered superior financial performance to Healius. Healius' cost base reset initiative announced in the half 1 '23 results implies a potential annualized EBIT saving of $95 million potential operational improvement benefit. Previous cost initiatives announced by Healius have had limited impact on margins and have faced implementation delays. ACL's management team has deep acquisition and turnaround experience and is well equipped to derisk Healius' operational turnaround. The merger allows us significant value creation with a potential merged group pro forma financial year '23 EBIT of $361 million, including expected cost synergies and the potential operational improvement benefit, with a potential value uplift of $2.1 billion if the merged group trades at the current blended forward EV/EBIT multiple of 17.5x, which equates to 90% increase in the value per Healius share implied by the offer consideration. And in addition, the merge group may potentially become eligible for entering to the S&P/ASX 100 over time. On to Slide 3. Under ACL's offer, each Healius shareholder is entitled to receive 0.74 ACL shares for each Healius share held. ACL's offer represents a 0 premium merger based on the volume-weighted average price of Healius shares and ACL shares on the ASX for the period from and including 28th of February 2023, being the date after which Healius released its half 1 report to the ASX for financial year '23, and the last practicable date. The merged group ownership upon successful offer completion will be 68% Healius, 32% ACL. Conditions include a 90% minimum acceptance, ACCC clearance. We have an application into the ACCC which we believe has strong arguments to support the merger. We look forward to engaging with them. FIRB approval; ACL shareholder approval under ASX listing rule 7.1; certain conditions relating to the financial performance in financial year '23; Healius not publicly making certain statements regarding the Healius Group not achieving a specified EBIT margin after financial year '23; Healius' net debt plus current tax liabilities, less current tax assets, not exceeding or being likely to exceed specified amounts; no material adverse change in respect of Healius or market fall following (sic) [ during ] the offer period; other conditions relating to Healius' financial condition, contracts and corporate actions and the conduct of the Healius Group business during the offer period. The merged group's proposed governance arrangements include the following. Senior management of the merged group is anticipated to predominantly comprise members from the ACL senior management team and may include certain members of the Healius senior management team. We intend to review the composition of the Board of the merged group and may consider the appointment of a number of current Healius directors as ACL directors. Slide 4, please. The merged group will be the largest pathology provider in Australia with a comprehensive national footprint and a diverse platform for growth supported by the merged group improved financial strength. This slide shows the current pathology footprint and where most of the synergies will be derived. On the right-hand side shows the financial scale of the merged group excluding the expected cost synergies and the potential operational improvements. The merged group will have increased financial size and a more flexible balance sheet; be better positioned to pursue future organic and inorganic growth opportunities, including internationally; have a compelling platform for expansion. The merged group is committed to bulk-bill outpatient pathology services in the same proportions as is current across both organizations. And I want to stress that collection centers are not part of the synergies and will be managed in the normal way. Slide 5. The proposed merger is expected to unlock $95 million of expected cost synergies with an estimated net value of between $1.3 billion and $1.6 billion. These synergies are calculated via a top-down bottom-up review based on our deep experience in pathology operations, acquisitions and integrations. The synergies consist of lab network consolidation, logistics optimization, back-office synergies as well as procurement benefits; and are informed by our demonstrated performance in achieving these kinds of outcomes historically. $55 million of $95 million will be captured within the first 2 years post completion, the remaining $40 million of $95 million to be realized over the following 2 years. And again I want to emphasize that these synergies do not include any change to the number of collection centers. They are not part of the duplicated footprint. Next slide, please, Slide 6. Since listing, the ACL management team has consistently delivered superior performance to Healius despite our smaller scale. This outperformance applies to whether we look at growth and profitability, investment and capital allocation or shareholder returns and balance sheet metrics. Next slide, please. The proposal derisks Healius' operational turnaround. Healius has set optimistic targets for its required turnaround, including a 6.7% margin uplift. However, the company has a track record of unsuccessful operational initiatives. There is $1.4 billion to $1.7 billion in value at risk in delivering these targets. On the left-hand side of this slide. Healius' first half '23 cost reset guidance implies a run rate EBIT margin of 11.3%, with $95 million upside relative to financial year '23 EBIT of $100 million. This implies a $1.4 billion to $1.7 billion value at risk when capitalized at the blended multiples of Healius and ACL. However, similar past initiatives have had repeated delays and no material identifiable margin impact. In 2018, Healius announced $100 million investment program for a new lab information system, funded by an equity capital raising. This announced investment has had repeated changes to program, timing and expected benefit, with minimal disclosure on progress. In 2019, Healius announced $70 million of costs saving over a 3- to 4-year period. Following this, they announced $70 million of cost saving delivered. However, only $58 million related to continuing operations. In 2020, Healius announced it would achieve 300 basis points sustainable margin improvement on the financial year '19 underlying EBIT margin by financial year '23. Following that, Healius announced $67 million of cost saving delivered. However, the first half of financial year '23 EBIT margin was below financial year '19 and the first half of financial year '20. On to Slide 8. The proposed merger derisks Healius' operational turnaround with access to ACL's management, systems and capabilities; and helps better secure that $1.4 billion to $1.6 billion (sic) [ $1.7 billion ] of value at risk. Despite ACL's smaller scale, we've consistently delivered higher margins due to the superior cost control and management of operating leverage as revenue grows. This is due to our management team with deep experience in pathology operations and demonstrated success in managing costs while maintaining service quality. And our performance-driven culture was focused on driving operational best practice and excellence in customer and clinical service. Our management team has a proven track record of delivering operational improvement initiatives such as implementing a single lab information system, delivering a complex core database upgrade, adopting state-of-the-art robotic laboratory equipment and integration of 5 acquisitions across 4 states. We have delivered more than 890 basis points in EBIT margin expansion between financial year '20 and the first half of financial year '23. Slide 9, please. If the merged group can achieve the expected cost synergies and the potential operational improvement benefit, this implies financial year pro forma EBIT of $361 million. This chart works out the potential merged group pro forma EBIT with the 2 base businesses, the expected cost synergies and the potential operational improvement benefit. As mentioned, the $95 million of annual pretax recurring cost savings equates to approximately 95% of Healius' financial year '23 EBIT. The potential operational improvement benefit reflects potential EBIT uplift from the delivery of Healius' group costs reset, as announced at Healius' first half '23 results, of $95 million. See appendix C for further detail on this. Slide 10, please. Under the terms of the offer, the merged group has the potential to deliver equity value uplift of $2.1 billion or an increase of 90% relative to the combined market value of Healius shares and ACL shares. This chart shows the stand-alone business value and merged group pre-synergies in orange. In purple, we show the merged group implied value post expected cost synergies and potential operational improvement benefit, with an implied value of $4.4 billion. Along with greater earnings diversity, enhanced scale, improved balance sheet strength, ability to invest and pursue growth opportunities, there's a potential re-rate via expanded liquidity and potential for S&P/ASX inclusion. Next slide, please. Australian Clinical Labs is led by a stable team with deep acquisition, integration and operational transformation experience across the pathology industry and other industries. Michael Alscher has been Chair of ACL and its predecessor since 2015. He has decades of experience in acquiring and integrating businesses and as Chair and director at several health care companies including diagnostics, general practice, emergency medicine and dentistry. I have been CEO of ACL and its predecessor since 2015. I have more than 15 years in pathology, including 7 years at Healius Primary Health Care; and 30 years in health care restructuring, including 25 years of this as a CEO. I've designed and led ACL's organizational restructure and transformation and overseen the integration of 5 ACL [ input ] acquisitions. I've also included here that profiles of our CFO and COO. And our bidder's statement has profiles on our leadership team. On average, each member of our leadership team has had 15 years of pathology experience and 24 years of health care experience. They've all had experience at restructuring business in ACL and in other companies. Slide 12. The ACL management has deep restructuring and transformation experience, acquiring and integrating 5 companies since 2015, consistently achieving or exceeding planned synergies on time and on budget to drive material value creation for shareholders. This slide shows our most recent acquisition, Medlab Pathology. We announced $10.5 million target synergies to be achieved within 18 to 24 months in late 2021. The synergy target was significantly exceeded with $17 million in synergies achieved by the 31st of December 2022, only 12 months after completion. The outcome has been a $21 million EBIT on a run rate basis as at the 31st of December 2022, implying a multiple of 3.1x on the acquisition price, supporting significant shareholder value creation. The second example here is the acquisition of and integration of St John of God pathology and Perth Pathology in Victoria and WA. Target synergies of $17.1 million was exceeded by $2.1 million. $13.8 million was achieved within 18 months of acquisition, and the remainder achieved within the following year. On top of this, we drive best practice operational performance to further improve benefits. Slide 13. We expect that the merged group will deliver stronger outcomes for doctors and patients and deliver ESG benefits. Increased free cash flow and balance sheet strength achieved through the proposed merger is expected to enable acceleration of investment to enhance and expand a range of patient and doctor services. Optimizing the combined lab networks will enhance regional access and provide a more sustainable regional service over time. And the combination of Healius and ACL is expected to create a more environmentally sustainable business through reduction in purchased electricity and refrigerants from optimized lab networks and a reduced national courier network equating to around 200 fewer cars and 1,100 tonnes of carbon reduction for the year. In addition, the merged group is committed to bulk-bill outpatient pathology services in the same proportion as is current across both organizations. Slide 14. Slide 14 shows the relative contribution of Healius and ACL to the merged group. The ACL Board believes that the offer consideration results in a fair distribution of value based on the relative contribution of Healius to the merged group. Slide 15, in summary. I have stepped through why the Board of Australian Clinical Labs believes that the merger of ACL and Healius will create Australia's largest pathology business operating across pathology and imaging with enhanced scale and profitability. It's expected to unlock approximately $95 million of expected cost synergies, with delivery expected within 4 years of completion, more than 50% within 2 years. It will derisk Healius' operational turnaround via access to the experienced management team of Australian Clinical Labs which has consistently delivered a superior financial performance to Healius. Based on Healius' recent announcement, a potential operational improvement benefit in addition to the expected cost synergies, has an annualized EBIT impact of $95 million. The merger allows for significant value creation with a potential merged group pro forma financial year '23 EBIT of $361 million, including expected cost synergies and the potential operational improvement benefit, with a potential value uplift of $2.1 billion, if the merged group trades at the current blended forward EV/EBIT multiple of 7.5 (sic) [ 17.5x ]. And in addition, the merged group may potentially become eligible for entry into the S&P/ASX 100 over time. Following this slide are appendices showing calculations for the offer conditions, expected cost synergies and potential operational improvements, for your reference. Thank you for listening. At this point in time, we will not be taking questions, but if you do have specific questions, please feel free to e-mail us at [email protected]. Thank you for your time.