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

Good morning. This is Australian Clinical Labs fourth 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 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. 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 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, Chair of our Audit and Risk Committee, Mr. Mark Haberlin; and also Ms. Christine Bartlett and Mr. Nathaniel Thomson. Our Company Secretary, Mrs. Eleanor Padman, is also joining us virtually from Sydney. Joining us virtually from Melbourne is our Chief Executive Officer and Executive Director; Melinda McGrath; and Fellow Director, Leanne Rowe. They are joined by Lana Hudson, our Deputy CFO; and 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 2024 financial statements and the conduct of the 2024 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 voting card button and providing a security holder number and post code. If you're an appointed proxy, please enter the proxy number issued by link in the proxy detailed session. 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 have finished voting on all resolutions, please click submit vote. At the end of the meeting, a countdown time 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 can find your questions and comments to the business at 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 will be taken this rate. The notice of meeting can be found on our website under the Investor Center tab and there is also a link on the AGM platform if we wish to download it from there. Today, I'll begin with my chair's address. then I'll invite our CEO and Executive Director, Melinda McGrath, to provide an overview of the FY '24 financial and operational achievements in FY '25 trading to date. We will then move to the formal part of the meeting. The notice of the meeting that was sent to shareholders contain 4 resolutions as well as the formal tabling of ACL's 2024 financial statements and auditor's report. We will now only be putting 3 resolutions to the meeting for shareholders to consider. Resolution 3, which concerns the granting of rights to our CEO, Melinda McGrath, has been withdrawn. This is because ACL has recently entered into a new contractual arrangement with Melinda, which include a new remuneration package, which we announced to the ASX 14 October. As such, this resolution is no longer required and is redundant. We will take questions as we address each item of business, and we will try to move at pace to ensure that we complete the agenda in our allocated time. In financial year 2024. ACL once again demonstrated the resilience, medical excellence and commitment required to meet the challenges of a financial year full of complex environmental demands and produced some fantastic results for our shareholders. On behalf of the Board, I would like to extend my gratitude to ACL's dedicated staff, whose expertise and commitment continue to positively impact our doctor and patient communities around Australia. I would also like to thank Melinda and the senior executive team for their experience, leadership and dedication to the continual improvement that is at the heart of ACL's success. I would like to take this opportunity to also thank our retiring Board members, Mr. Andrew Dutton and Nathaniel Thomson. Both have added their significant expertise to the ACL Board and will be missed. A recruitment process is in place to commence recruitment of new board members, and we hope to make some announcements before Christmas. By FY '24 -- FY '24 was a year in which the dust from the pandemic finally began to settle, and we began to see clear signs of recovery in the pathology sector. There were still many external challenges largely stemming from the pandemic, including ongoing inflation, a sluggish return to pre-pandemic routine pathology testing and lingering health care availability issues. Despite this, the ACL team delivered some outstanding results are summarized below. In FY '24, ACL generated revenue of just shy of $700 million, which was in line with FY '23 despite a near 60% decline in COVID revenue. ACL achieved an underlying EBIT of $62.6 million, which was realized by our strong second half performance of $39.1 million and an 11% margin and an underlying net profit after tax for the full year of $31.6 million. The company announced a final fully franked dividend of $0.09 per share which when combined with the interim dividends, delivered total fully franked dividends for the last financial year of $0.12 per share. This represents a 4.6% fully franked dividend yield based on the share price on the 27th of August when our results were announced. ACL's continue to focus on operational improvement allowing profit margins to stay constant despite the external pressures mentioned above. We continue to evaluate potential acquisitions, but we will only progress with appropriately priced and accretive acquisitions. Key targets include domestic pathology, strategically aligned domestic adjacencies as well as international pathology. We expect to advance SunDoctors acquisitions as well during the course of the next financial year. ACL is in its fourth year of the execution of our ESG strategy, and it continues to deliver strong performance, positive change over time. ACL acknowledges the significance of environmental, social and governance priorities as a strategic enabler, enhancing our long-term resilience and sustainability, but also actively contributing to the well-being of our society. Key ESG highlights for FY '24 include the implementation of cold chain logistics removing approximately 26 tons of packaging, increasing the number of hybrid cars across the group and further optimization of brewer planning for courier pickups, resulting in a 9% reduction in kilometers per episode. ACL rolled out our respect at Clinical Labs campaign to all staff with the aim of increasing awareness of respectful behavior, and prevention of sexual investment while improving personal safety and psychosocial health and wealth. We have further improved gender diversity at both the board and executive level with female Board representation of 43% and female executive representation at 33%. ACL has continued its cybersecurity program has continued to improve its NIS score. Our Chief Information Security Officer was appointed governing our cyber risk management processes. The Board also endorsed ACL preparing a reflection reconciliation action plan for submission to Reconciliation Australia. A working group was established and a draft reconciliation action plan was prepared and submitted to reconciliation Australia during FY '24. ACL intends to launch its reconciliation actual plan in FY '25. In FY '24, the federal government announced indexation to approximately 1/3 of the total pathology items. While the industry appreciates indexation, unfortunately, this change has been largely offset by fee cuts on certain tests. Meanwhile, the remaining 2/3 of items remain unindexed. Suffice to say, this was not the outcome we were expecting. ACL, along with other providers will continue to build awareness through our strong patient community networks of more than 1.2 million people per week, to engage, educate and ultimately create a more sustainable pathology sector. The Board announced a 12-month on-market share buyback program up to 20 million ACL shares, which equates to approximately 10% of the company's outstanding share capital. This decision was made possible due to the strong balance sheet position ACL has built in recent years with net debt of only $28.9 million as of the end of FY '24 when you exclude lease liabilities. We believe, based on the strong balance sheet and cash conversion that a share buyback program may provide an opportunity to enhance value for shareholders without compromising the company's strong capital position and ability to execute on its growth strategy. The buyback is expected to reduce the shares on issue with a resulting improvement in earnings per share, dividends per share and return on equity. The Board and I strongly believe, given ACL's outlook, this is a sensible use of our balance sheet capacity at this time. With the fallout and disruption of 20 years of pathology growth due to the global pandemic starting to ease, ACL has successfully weathered the storm and emerges in a position of resilience and strength. We have a strong balance sheet, a diverse customer base and are poised to capitalize on a return to stronger growth levels. ACL is an essential service at the forefront of array of new technological advancements that enhance the health of our patients. I see ACL benefiting from these technological developments, population, demographic changes and the aging population. Once again, I'd like to thank my fellow directors and the entire ACL Group for their truly commendable efforts and their steadfast commitment to our mission and to you, our shareholders, from being an integral part of our journey. Thank you. I'd like to now hand you over to Melinda McGrath, the group CEO presentation.

Thanks, Michael. Financial year '24 has been a year of transition for the health care and subsequently, the pathology sector as we move out of a covered environment. The ongoing lag in health care recruitment due to a lack of immigration when borders were closed, workforce retirement through the pandemic and billing practice changes leading to reduced GP hours nationally continued to affect the entire industry throughout the first half of financial year '24. I'm pleased that this did improve in the second half. Returning medical and nursing practitioners helped remove hospital bottlenecks availability improved greatly, and we're starting to see a return to more normal ordering patterns, which is terrific news for the future health of Australians. Consequently, our 2024 results are a tale of 2 halves. Underpinned by the resilience and diversification of our business. ACL teams have yet again successfully steered the company through an unpredictable and changing external environment and produced a great set of results. Our key financial metrics include in the 12 months to the 30th of June 2024, revenue of $696 million in line with financial year '24 guidance and financial year '23 revenue despite a 59% decline in COVID-19 revenue. Non-COVID revenue of $646.7 million up 5.4% on financial year '23 with half 2 up 6.9% on the prior corresponding period. Underlying EBITDA of $191 million, up 1.3% on financial year '23, again, noting the decrease covered revenue. Underlying EBIT of $62.6 million, in line with financial year '24 guidance with half 2 at an 11% margin and half 1 at a 7% margin. Adjusting for the decline in COVID revenue, financial year '24 underlying EBIT grew by 24%. Underlying NPAT was $31.6 million, Free cash flow before interest, tax and financing was $54.4 million, up 4% on financial year '23. And we declared a final fully franked dividend of $0.12 per share, a dividend yield of 4.6%. ACL's ability to drive continuous operational improvement through focused KPI improvement programs has helped us to hold margins constant despite subdued volumes and industry cost pressures. Culturally, we have a laser focus on performance in this cascade throughout the organization and is aligned with the requirements of our patients, referrers and shareholders. Our project management office has a range of operational improvement projects underway, which are rolled out nationally onto our unified laboratory information system. ACL is the only national laboratory in Australia with a single instance of its LIS interconnected across the country, allowing pathologists and scientists to work in a borderless manner. It enhances our agility, it negates size differential and enhances our operational leverage. In financial year '24, we have completed several projects which have been rolled out nationally. They include upgrades to blood banking and life-saving emergency medicine, machine learning and automation of our blood film production, which improves hematologist productivity, cybersecurity upgrades and additional specialized cyber staff, upgrades to our electronic results platform, major networking upgrades for the Clayton laboratory, deployment of a cloud-based dictation system for pathologists and improvements to our telehealth platform for patient electronic requesting. Our growth strategy is centered around 6 pillars: a disciplined network expansion, indexation campaign growth of strategic new business, accretive acquisitions, billing enhancements and operational improvements. Financial year '24 illustrated our strategic focus on disciplined network expansion and profitable revenue to preserve margins. We chose not to drastically reduce our footprint as we are consistent in our review of margin producing revenue. We continue to replace lower performing collection centers with better performing sites, which resulted in an improvement in the mix. Our Medlab investment has continued to grow revenue which at the time of acquisition offered a low routine pathology volumes due to it being situated in a COVID outbreak area. In financial year '24, we continued our focus on advanced genetic testing with ACL capturing a disproportionate share of the genetic carrier screening market, and we made further headway into the noninvasive prenatal testing market. ACL and Geneseq due to launch Melaseq our melanoma tissue and blood test with commercialization to commence imminently. This test features world-first cutting-edge science and is aimed at patients who are considered high risk for melanoma, of which there are approximately 2 million in Australia alone. The launch of these tests fit strategically with our SunDoctors business as well as our surgical referral processes. We reaffirm our guidance of an underlying EBIT of $65 million to $73 million. This financial year to the 23rd of October has seen day line volume growth of 6%. Please note that while good growth trend has not been established as market volumes dropped off in the second quarter of financial year '24. Like financial year '24, we expect absolute volumes of the second half financial year '25 to be stronger than the first half. I would like to finish by thanking our pathologists and scientists for their leadership and clinical lab teams across the country for their unwavering focus on our vision, our values and their customer centricity. I would like to call out our executive and management teams and highlight again their continued focus and performance of all types. I also thank our shareholders for their continued support. And finally, I'd like to warmly thank our retiring Board members for their teamwork, service and expertise. It has been valued highly. Thank you, Michael.

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 2024, together with the director's report and the auditor's report, which are included in our 2024 annual report and which have been published on our website. I formally table the 2024 financial statements of ACL for the financial year ended 30 June 2024, the directors' report and the auditor's report. I will take all these reports as read. We will now take any questions submitted via the virtual meeting platform. 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, we've had 3 questions from a shareholder, Mr. Arthur. They're on the same topic, namely the Healius merger, so I'm going to paraphrase them. Essentially, the question is why did we think Healius was an appropriate takeover target? And what discussions did we have the ACCC about the structure of the facility industry?

Thanks, Ele. Look, I'm not sure there is any value in prosecuting this at this stage given the merger is no longer moving forward. And we just say we have a very different view in regards to the success of the merger and the value for groups of shareholders in a merger is considerable. I'd also like to state that the ACCC's response was not unexpected. Any other questions, Ele?

We have no other questions on this item of business.

Great. Thank you. The next item of business is a nonbinding shareholder resolution to consider the adoption of ACL's 2024 remuneration report. The remuneration report is contained within the 2024 director's report and forms part of the 2024 financial statements and reports. Ele, are there any questions in relation to this resolution?

Michael, there are no questions in relation to this resolution.

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 the members to consider and, if in favor, to pass the following resolution, that for the purposes of Section 250R and Brackets 2 of the Corporations Act and for all other purposes, the remuneration report of the company for the financial year ended 30 June 2024 as disclosed in the Director's report be adopted. Please can you all take a moment to cast your vote. [Voting]

Thank you. As the next resolution concerns my reelection as a director, I will now invite Mr. Mark Haberlin to act as Chair for this section of the meeting. Thank you, Mark.

Thank you, Michael, and good morning. This resolution is to consider the reelection of Mr. Michael Alscher in accordance with the Corporations Act and ACL's constitution. Michael is the Chair of our Board and has been a Nonexecutive Director of ACL since December of 2020 prior to ACL's IPO. Michael was previously a Nonexecutive Director of Clinical Labs Proprietary Limited, ACL's principal operating subsidiary as part of its acquisition by President Capital Partners in 2015. In accordance with ACL's constitution, Michael now stands for formal reelection by shareholders following the conclusion of his first 3-year term following the IPO. As shareholders will be aware, Present Capital recently divested its shareholding following a 9-year commitment to the business, which saw its transformation small business to its current status as a listed company in the ASX 300. Michael remains a shareholder of ACL in his personal capacity and the Board is extremely grateful for his willingness to continue as a nonexecutive director and in the role of Chair given the significant expertise in the health care sector and is the knowledge of ACL's operations. The Board believes that Michael's reelection will bring continuity and stability for the Board as ACL continues to mature as a listed business. The Board, with Michael abstaining, unanimously recommends that shareholders vote in favor of his reelection. Ele, are there any questions in relation to this resolution?

There are no questions in relation to this resolution.

Thank you. Displayed now on the screen are the proxies that have been received to date. As Chair of the meeting for this resolution, I intend to vote all undirected proxies in favor of the resolution. I now put the resolution as follows: that Mr. Michael Alscher retiring as a director of the company in accordance with rules 6.1(f)(i)(A) and 6.1(g) 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 61 of the company's constitution. Please, can you all take a moment to cast your votes? [Voting]

Thank you. I will now hand the chair back to Michael.

Thank you, Mark. And now to the final resolution for today's meeting being Resolution 4 in the notice of meeting. This resolution relates to the renewal of shareholder approval to maintain the company's LTVR plan so that ACL can issue securities from time to time to eligible employees as part of performance-based remuneration as an exception to ACL's placement capacity under ASX Listing 7.1. The LTVR plan was last approved at ACL's first AGM in 2021. Under the ASX listing rules, shareholder approval must be renewed every 3 years. The board has the discretion to determine which employees are eligible to participate in the LTVR plan and the number of securities that will be offered. The purpose of the LTVR plan is to align the interest of employees with the interest of shareholders by providing an opportunity for employees to receive an equity interest in the company. Resolution 4 seeks shareholders' approval for the adoption of the LTVR plan for the purposes of ASX Listing Rule 7.2, exception 13b. As an exception to ASX Listing Rule 7.1 in whereby shareholders may approve in advance the issue of securities made under the LTVR plan as an exception to the limit on the Listing Rule 7.1. Further details concerning the LTVR plan and the number of rights issued since the LTVR plan was last approved by shareholders at the 2021 AGM is set out in the Notice of Meeting. As of the date of this meeting, the company proposes that the maximum number of securities to be granted under LTVR plan within the 3-year period following the approval of this resolution will not exceed 10,091,701 rights, being 5% of the shares on issue as at 13th September 2024, when the notice of today's meeting was finalized. The Board unanimously recommends that shareholders vote in favor of this resolution. Ele, are there any questions in relation to this resolution?

Michael, there are no questions in relation to this resolution.

Thanks, Ele. Displayed now on the screen are the proxies that have been received to date. As Chair of the meeting, I intend to vote all undirected proxies in favor of the resolution. I will put the resolution as follows: that for the purpose of ASX Listing Rule 7.2, exception 13 and for all other purposes, approval is given to maintain the company's LTVR plan on the terms and conditions described in the explanatory memorandum accompanying this notice of meeting and for the issue of securities pursuant to the LTVR plan as an exception to ASX Listing 7.1. Please, can you all take a moment to cast your vote? [Voting]

Thank you. Fellow shareholders, that now concludes the formal part of the meeting. Voting is about to end. So please take a moment to ensure that your votes have been submitted. Once all the votes have been reconciled by our share registry, Link Market Services, the results will be published on the ASX later today. Thank you all for attending our fourth AGM and for your continued support of our company. Thank you again, and goodbye.