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

Good morning, everyone. This is ACL's third AGM, and it gives me great pleasure to welcome you all to the meeting today. My name is Michael Alscher, and I have the privilege of being the Chair of your Board. I'd 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. I've been informed 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'd 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, Andrew Dutton, the Chair of our Audit and Risk Committee, Mark Haberlin and also Christine Bartlett and Nathanial Thomson. Our Company Secretary, Eleanor Padman, is also joining us virtually from Sydney as is the company's legal adviser, John Williamson-Noble from Gilbert + Tobin. Joining us virtually from Melbourne is our Chief Executive and Executive Director, Melinda McGrath and fellow Director, Leanne Rowe. They are joined by James Davison, our CFO. Also in Melbourne is ACL's auditor, Stephen Whitchurch from Pitcher Partners. Stephen will be available to answer questions that shareholders may have in relation to the 2023 financial statements and the conduct of the 2023 audit. I will now take a moment to explain the interactive features of the webcast platform that we're using today. A virtual meeting online guide was sent to shareholders with the notice of meeting, and I'll now run through the key features. To vote, you'll need to register by clicking on the get a vote -- voting card button and providing your security holder number and post code. If you're an appointed proxy, please enter the proxy number issued by 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'll 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 have finished voting on all resolutions, please click submit 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 questions, 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, 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, if you wish to download it from there. Today, I will begin with my Chair's address. Then I'll invite our CEO and Executive Director, Melinda McGrath, to provide an overview of the FY '23 financial and operational achievements and FY '24 trading today. We will then move to the formal part of the meeting. As well as the formal tabling of ACL's 2023 financial statements and Auditor's Report. We have a busy agenda with 6 resolutions for shareholders to consider. We will take questions as we address each item of business, and we'll try to move at pace to ensure that we complete the agenda in our allocated time. Financial year 2023 was very much a transition year, dealing with the end of the pandemic, resetting the business for a post COVID-19 operating environment and the challenges of inflation, and a workforce that has been operating under considerable pressure for some time. I want to extend my appreciation to our exceptional ACL team throughout the organization, who rose to these and other challenges throughout the year and ultimately delivered a strong operating and financial result once more. Benefiting from the strong and resilient operating platform created over the past 8 years, ACL delivered excellent results in FY '23, including strong growth of our core non-COVID business operations. Among our FY '23 financial highlights, ACL delivered more than 9 million pathology episodes generating a revenue of just under $700 million. ACL also continued its operational improvement program, which led to profit margins as measured by earnings before interest and tax reaching 10.1%. ACL's key growth drivers continue to guide our business forward. ACL delivered an 11.4% increase in base business growth compared to FY '22 and above-market growth from our SunDoctors business. While COVID-related revenue has reduced sharply, our strategic investments in SunDoctors and Medlab have been fully integrated into the business ahead of schedule, making ACL a stronger company coming out of the pandemic than we were going into it. ACL continues to focus on key operational initiatives. And in FY '23, we had a disciplined and structured wind down of COVID-related costs in line with testing volumes. A significant upgrade of the base Laboratory Information System was also completed and the rollout of our patient-centered digitization program was commenced. ACL also implemented a number of operational improvement projects with benefits continuing to accrue into FY '24. The challenges brought about by a high inflationary environment, coupled with the broader health care market still operating at lower levels of activity and the supply constraints of clinicians throughout the health care sector have been material impact on the pathology sector. And our company has handled these operating dynamics head on. One of the areas I'm proudest of as Chair is ACL's continued position as a leader in science and technology. In 2018, ACL made a strategic investment in an innovative genomic testing business, Geneseq. During FY '23, Geneseq completed validation studies for both early- and late-stage melanoma detection using genetic technology applied to tissue and blood. The test that Geneseq have developed are material and represent diagnostic leadership on a global basis. ACL has a 10-year exclusivity period for the international patent pending technology and commercialization is expected to begin in FY '24 as final regulatory approvals are received in Australia. Geneseq will be making a number of announcements over the coming months as its products move to commercialization and digital forms of cancer tests are developed using the same diagnostic platform. To give shareholders a sense of what we're talking about, one needs to look no further than at the success and opportunity of the gallery product in the U.S. owned by GRAIL, an Illumina subsidiary. In March 2023, ACL announced its intention to make an off-market takeover bid for Healius Limited. Which, if successful, would create Australia's largest pathology provider, giving the combined entity the capacity to invest in emerging advances in diagnostics with international potential, as well as market-leading front-end solutions to enhance doctor, patient and customer experience. The offer is subject to ACCC in further approval and other conditions. We remain in discussions with the ACCC, and as is always the case with the larger mergers in concentrated industries, there are many stakeholders which wish to be heard and many questions to be answered. This takes time and requires patience. We continue to make our way through this process and remain of the view that the proposed merger is in the national interest and is good for the country, patients, staff and shareholders. In regard to shareholders, in particular, the offer made to Healius shareholders represent a nil premium merger, price at the time of the announcement and the merger structure allows both groups' shareholders benefit from the value creation of a combined company. We believe the potential value creation of the proposed merger for both sets of shareholders is too large for either shareholder group to ignore. We are hopeful that following ACCC approval, we can work in a collaborative and productive way with the Healius Board to ensure this transaction takes place. With the aim of achieving the potential value creation of the proposed merger for both shareholder groups. At the end of the day, for either company to ignore such a merger opportunity, it would need to form a view that it has a stronger future on its own. We cannot see a basis for either company to genuinely come to this conclusion, given how compelling the value creation opportunity is. From a board governance point of view, I'm fortunate to be surrounded by an engaged and talented Board whose members uphold the ACL values as rigorously as our staff. In FY '23, the ACL Board completed a Board performance evaluation, which resulted in a range of action items to be implemented. A new charter for Audit and Risk Committee was drafted and adopted and we continue to review and update the Board's skill matrix and succession plan. I'd like to take this opportunity to welcome Christine Bartlett, who commenced as a new Non-Executive Director of the ACL Board on August '23. Christine is an experienced Non-Executive Director with extensive executive experience gained through Chief Executive Officer and senior executive roles with National Australia Bank, IBM and Jones Lang LaSalle. Pending Christine's election to the Board by shareholders at this meeting, we look forward to drawing on her vast experience as we move forward. In FY '23, ACL continued to prioritize environmental stewardship, good governance and social responsibility. Our ESG strategy continues to deliver strong performance across all areas of our ESG mission. We have upheld our commitment to sustainability and environmental stewardship by the continued reduction in our carbon footprint through the rollout of hybrid cars, increased installation of solar panels in laboratories and a reduction in consumable packaging. ACL's dedication to environmental sustainability aligns with our broader mission of improving health outcomes for generations to come. Some of our other ESG highlights include achieving a continued reduction of our lost time injury frequency rate; increasing female board and management representation, respectively; increasing digital pathology referrals to 19%, up from 11% in the first half FY '22; and commencing our Reflect Reconciliation Action Plan, which aims to strengthen relations between Aboriginal and Torres Strait Islander and non-indigenous peoples and contribute in a meaningful way to national reconciliation. On behalf of the ACL Board, I'd like to thank Melinda McGrath, the senior leadership team and all of ACL's dedicated employees for their commitment and the important work that they do on a daily basis. By creating a culture of innovation, continuous improvement and doctor patient centricity, we uphold our mission to empower decision-making that saves and improves patient lives. I would also like to extend my gratitude to our shareholders for their support and trust in our organization. I'd like to now hand you over to Melinda McGrath for the group's CEO presentation. Thank you.

Thank you, Michael, and good morning to you all. I would like to start by thanking Australian Clinical Labs more than 5,000 employees who, as always, have worked tirelessly to reorient the business post-COVID and continue to provide our usual outstanding service to our patients and medical communities. It was a difficult undertaking to dismantle our COVID infrastructure in a timely manner due to the steep drop-off in COVID testing rates. And the teams did an excellent job of managing this change. I'm pleased to let you know that in financial year '23, despite Australia's health care access and resource challenges caused in part by years of low immigration rates for medical and nursing workers, ACL has just delivered a strong performance with the growth trajectory of our base business increasing 11.4% compared to financial year '22. The majority of this growth came from specialists and general practitioners. As a brief overview, I'd like to share with you some of the key metrics to illustrate our financial year '23 performance. In the 12 months to 30th of June 2023, Clinical Labs has achieved revenue of $697 million, with non-COVID revenue up 11.4% on financial year '22; EBITDA of $193 million, representing a 27.7% margin; EBIT of $70.3 million, representing a 10.1% margin; strong operating cash flow of $59.2 million with 90.5% cash conversion; low gearing with net debt at $45.7 million, which is 0.7x financial year '23 EBITDA AASB 117. We have a strong balance sheet with capacity for growth. The final dividend declared was $0.07 per share, which combined with the interim dividend of $0.07 per share, takes our full year dividend to $0.14 per share. The full year dividend represents 67% of NPAT and a 4.4% dividend yield based on the share price at 18 August of $3.18, and 5.1% based on the share price on 17 October of $2.75. And the Board continues with its target dividend payout ratio of 50% to 70% of NPAT based on the full year NPAT. And in the last 2 years, the company has paid out $0.67 fully franked. The ACL team has delivered a continued strong financial performance executed in a disciplined manner. As part of our growth plan, we've continued our commitment to bring new genetic tests to Australia. In 2018, we made a strategic investment in a company called Geneseq to develop a multi-tissue and blood plasma genomic test for melanoma. The test, named Melaseq is an exciting development to aid in the diagnosis and appropriate treatment of a key cause of cancer. Melaseq opens up the potential for earlier, less invasive and more accurate screening and diagnosis of individuals at risk of melanoma and can detect the cancer at all stages. Following groundbreaking research recently published in the British Journal of Dermatology showing 93% sensitivity and 98% specificity for invasive melanoma detection, commercialization of the Melaseq test for melanoma is planned within the coming months with final approval for the skin biopsy application of Melaseq expected soon, followed quickly by a plasma approval. As medical science progresses, we will continue to invest in this space, and these and other tests such as our liquid biopsy options will form part of a suite of personalized medicine options that our doctors and patients can turn to as they seek to improve their outcomes. In financial year '23, our IT team introduced some innovative patient-facing solutions designed to improve the way pathology request forms are received. SMS eRequests were made available for patients allowing them to receive electronic copies of the referrals directly from their doctors' practice management system. Leveraging our team of experienced in-house developers, we continue to enhance our customer-friendly front-facing eHealth products, including eOrders, eDownloads and eResults. Our paperless pathology project is now underway, aimed at increasing the accuracy of pathology referrals and decreasing wastage in paper by utilizing our digital health suite to enhance and improve these clinical outcomes. It is our focused business improvement programs such as these that enable us to continue to grow and innovate and achieve and maintain strong operating margins. Some of the projects progressed across financial year '23 and into financial year '24 include continuous ACC review process to allow us to focus on profitable growth, removal of COVID collection centers achieved in a timely manner in H1 '23, integration of Medlab's laboratories, generating $20 million of annual savings achieved in '23, digitization rollout and transition to progress to paperless referrals. And we've also commenced an exciting and transformational operational project to complement our growth plans. This project, the Lab of the Future, is focused on redesigning our operations to maximize our strategic advantage. Our one lab information system across the country and our learnings about borderless workflow we gained through COVID. During COVID, we were able to trial operations without borders based on the most efficient way to do the work, not its location. The Lab of the Future project will integrate these learnings, our digitization projects, the latest in laboratory automation and digital enhancement in the world with world-class front end processes and logistics. To improve clinical service and connectivity while minimizing our laboratory footprint and maximizing our efficiency further. This project will have benefits from this year and over several years, and applying these benefits from our one lab information system allows us to measure and share best practice innovations in our laboratories throughout Australia. Looking forwards to financial year '24, while the underlying core business continues to grow back to trend, negligible COVID revenue is expected in the financial year '24 result, a gap that needs to be closed to deliver total revenue growth as we focus on our revenue enhancement programs. First quarter results in the underlying core business remain affected by a health care sector reemerging after nearly 3 years of dealing with the COVID-19 pandemic. Workforce availability and access to services are affecting health care service volumes. The market continues to rebuild volume levels post-COVID as doctor access issues and private hospital capacity improves. In quarter one, human pathology is more than 5% growth for the first quarter of financial year '24 versus the same time last year. This excludes Queensland, where we've exited a number of underperforming Medlab legacy collection centers. COVID and respiratory testing are down 76% for the quarter on the prior year representing about 5% of total revenue. As a result, as per previous guidance, we believe that ACL will achieve a similar EBIT result in financial year '24 of between $65 million and $70 million. In conclusion, I would like to thank all of our stakeholders, our more than 5,000 employees, our many supportive medical professionals and our excellent management teams at all levels. I'd like to thank our pathologists for their leadership, and I would also like to thank our shareholders for their continued support in our shared vision. I'd like to now hand you back to our Chair, Michael Alscher.

Thank you, Melinda. I'd 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 2023, together with the Directors' Report and the Auditor's Report, which are included in our 2023 Annual Report and which have been published on our website. I formally table the 2023 financial statements of ACL for the financial year ended 30 June 2023, 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.

Ele, are there any questions for Melinda or for me in relation to the company's performance or any of the matters raised by Melinda in her address?

Michael, there are no questions on this item of business.

Are there any questions -- thank you. Are there any questions in respect to the 2023 financial statements for the auditor?

Michael, there are no questions on this item.

Okay. Thank you. The next item of business is a nonbinding shareholder resolution to consider the adoption of ACL's 2023 Remuneration Report. The Remuneration Report is contained within the 2023 Directors' Report and forms part of the 2023 financial statements and reports. Ele, are there any questions in relation to this resolution?

Michael, there are no questions for this item of business.

Thank you. Displayed now on the screen are the proxies that have been received to date. Any votes from directors, key management personnel and their associates have been excluded from this resolution. As Chair, I intend to vote all undirected proxies in favor of the resolution. I now move for members to consider and if in favor, to pass the following resolution that, for the purposes of Section 250R(2) of the Corporations Act and for all other purposes, the Remuneration Report of the company for the financial year ended 30 June 2023 as disclosed in the Directors' Report be adopted. Please, can you take -- all take a moment to cast your vote? [Voting]

Thank you. The second resolution is to consider the reelection of Christine Bartlett in accordance with the Corporations Act and ACL's constitution. Christine is our newest director and was appointed to the Board as a casual vacancy on 23 August 2023. In accordance with ACL's constitution, Christine now stands for formal reelection by shareholders at this, the first AGM following her appointment. The Board is delighted that Christine agreed to join ACL's Board given their extensive executive experience gained through Chief Executive Officer and senior executive roles with National Australia Bank, IBM and Jones Lang LaSalle. Christine has held roles with national and global responsibilities and has a strong commercial perspective, particularly in fostering innovation and leveraging new emerging technologies. Christine also had significant experience in the health care industry, having been a Non-Executive Director of Sigma Healthcare Limited since March 2016. Christine is a member of the New South -- University of New South Wales Australian School of Business Advisory Council, Chief Executive Women and the Australian Institute of Company Directors. Christine holds a Bachelor of Science from the University of Sydney and has completed senior executive management programs at INSEAD. The Board, with Christine abstaining, unanimously recommends that shareholders vote in favor of her reelection. Ele, are there any questions in relation to this resolution?

Michael, there are no questions on this item of business.

Thank you. Displayed now on the screen are the proxies that have been received today. As Chair, I intend to vote all undirected proxies in favor of the resolution. I will now put the resolution as follows: that Christine Bartlett having been appointed by the Board as a Director on 23 August 2023 to fill casual vacancy under rule 6.1(d) of the company's constitution and retiring as a director of the company for the purposes of ASX Listing Rule 14.4 and rule 6.1(e) of the company's constitution, and who has consented to stand for reelection and being eligible, be reelected as a director of the company in accordance with Rule 6.1(i) of the company's constitution. Please, can you take a moment to cast your vote? [Voting]