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

Good afternoon, everyone. On behalf of ACL, I'd like to start by acknowledging the traditional custodians on the land on which we meet today. Today, I'm joining you from Sydney on the lands of the Wangal and Gadigal peoples 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 their elders past and present and extend that respect to Aboriginal and Torres Strait Islander peoples here today. Welcome to the investor webinar for Australia Clinical Labs Half Year Financial Results. My name is Eleanor Padman, and I'm the Company Secretary at ACL. I'm joined today on this webinar by our Group CEO and Executive Director, Melinda McGrath; our CFO, Matt Cordingley; 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 participating in that recording. If you'd like more information, you can find a copy of our privacy policy on our website. During the webinar, you will hear presentations from Melinda and from Matt, and then we'll have time for Q&A. [Operator Instructions] Once we move to Q&A, we'll focus on the more frequently asked questions, and we'll try to get through as many as possible in the time we have available. I'd now like to hand over to our Group CEO, Melinda McGrath.

Thanks, Ellie. On to Slide 4. Thanks, Ellie. Good afternoon all. Welcome to our results presentation for the first half of financial year 2026. The results presented today show an improved underlying profitability, margins and EPS growth, which has been achieved in an environment of change in the industry with many variables being managed concurrently. Our ability to absorb the annual inflationary impacts on labor costs where the Fair Work Commission increased wages under modern awards by 3.5% plus the 0.5% increase to superannuation, the other broader inflationary pressures across our cost base and yet deliver earnings growth in a challenging market underscores the effectiveness of ACL's strategic initiatives, flexible business design and operating leverage. We've responded to the challenging external environment by optimizing our ACC portfolio, focusing on contract management. And operationally, we've seen the positive impact of our AI and automation projects on the digitalization of our billing practices. The progress achieved this half provides a strong foundation for sustainable earnings growth into the future volumes improve towards long-term average. We've continued to focus on revenue-enhancing projects, efficiency, disciplined capital allocation and targeted growth in specialized diagnostics, all of which remain central to our strategy. ACL is differentiated by its competitors due to the single operating platform. The work we've completed over several years, integrating disparate systems into one operating platform is our competitive advantage. It ensures the business is uniquely positioned to capitalize on opportunities due to the underlying structural design of the business. Since the increase of the bulk billing incentive in November, we have seen positive impact on GP attendances, which should flow through to pathology referrals. I'll provide further color into revenue on the next slide. The results are revenue of $365 million, which is negative 1% on the prior corresponding period. EBIT is $28 million, which is a 7.7% margin, and I note a half 1, half 2 skew as usual. The EBIT growth was positive 2.4%, with margin expansion of 30 basis points on the previous corresponding period. This was driven by ACC and commercial portfolio changes and sustainable technology and productivity improvements. This combination of financial and operational discipline and lower depreciation has produced a nearly 9% growth in underlying net profit after tax. Underlying earnings per share of $0.067 is up 12.8% on this increased profitability and the impacts of our buyback program over the last 12 months. Our strong balance sheet and confidence in our strategies means we will continue to buy back shares in the second half of financial year 2026. Free cash flow was down on PCP, primarily due to a one-off AIC settlement and negative working capital movement is expected to reverse. We retain a strong balance sheet, underpinning returns to shareholders via dividends and the share buyback. Capital returns were $27.8 million in half 1, which is equivalent to around 6% of current market capitalization. We've declared an interim dividend today of $0.0375 per share, a $0.0025 per share increase on half 1 2025. Our core strategy remains focused on driving margin accretive top line growth through disciplined network and contract expansion, investment in strategic new business, including non-Medicare funded pathology and adjacencies and implementation of revenue and billing enhancements. Overlaying this, we'll continue to invest in and apply innovation to our operations. Slide 5. Thanks, Ellie. This slide shows the major components that have contributed to the revenue performance this half. We don't intend including this slide in every results presentation, but we thought given the variables in this half, we would provide more color. If we hadn't made the changes I have mentioned, we would not have had the earnings performance we had in the half. And we think we're in a very good position once market volumes and revenue starts returning to trend. The slide explains the impact of rationalization of our network, Medicare cuts to vitamin B12 and the sluggish GP consultation market. Slow GP referred market volumes has been caused by a reduction in attendance at GP practices. This has had the greatest revenue impact. And if it had not been so slow, our leverage would have been even greater in the half from this part of our portfolio. We've restructured our collection center contracts portfolio to focus on profitable revenue. Once again, if we hadn't done this, our growth would have been higher, but earnings lower if we hadn't made these changes. The costs associated with that cohort of ACCs were greater than the revenue. The Medicare stats don't show the portion of the market that is unprofitable. We've also pulled out a couple of contracts that have become a drag on profit over time. Other providers are likely to have taken over some of this unprofitable work. Those looking from the outside compare revenue performance to the market. However, a not insignificant portion of the market is not profitable, and it's not where we want to be. So growth comparisons should always include profitability comparisons in my view. The fee cut for Active B12 and other testing was offset to a small degree by part indexation, and we've made most of this back from our other activities, including patient upfront billing. For us, this deficit would have been around $14 million otherwise. We've implemented digitalized upfront patient billing for unfunded tests with corresponding improvement on average fee and bad debt write-off reduction. The result is that the overall revenue declined 1%, while earnings grew. We expect to see increased GP consultation volumes due to the impact of bulk bill incentive program, and we believe the business is positioned well to capitalize on any increases in volume. On to Slide 6. Thanks, Ellie. ACL is the only national provider with a single national laboratory information system. Having the same system across the country reduces duplication, drives cost efficiencies and enhances customer services. It enables first-to-market bolt-on technology and sustainable and continuous improvement. Having one version of the lab system reduces duplication, IT effort, management staff, professional staff, duplicated rosters, compliance and accreditation costs and enables first to market on efficiency projects and revenue maximizing activities applied to every business unit across the country at the same time. The work we've done on upfront billing as one example, took approximately 2 years to get right at the front and the back end, noting there are thousands of test combinations and algorithms. If we had several versions of the LIS, we would have had to program multiple systems taking years longer. Again, this efficiency is evidenced by our labor as a percentage of revenue results. Operational highlights are this half, despite the revenue drop and the inflationary impacts of wage increases, labor as a percentage of revenue is continuing to perform at less than 44%. Lab operational efficiency rose 10%. Logistics efficiency increased 13%. Consumables as a percentage of revenue decreased 40 basis points to 17.4%. We're leveraging our shared services operations in Malaysia. We have a patient NPS score of positive 79. And we're in final testing of AI to enhance back-office functions, including manual data entry processes that will produce savings into 2026 and beyond. In addition to comments on the previous slide about revenue, genetic reproductive health, we see above-market growth of 10% for carrier screening with improved growth in NIPT and other fertility testing. We have increases in oncological genomic testing, in particular, with the exclusive provider of EndoPredict, which helps to define the risk of breast cancer recurrence, the benefits of chemotherapy and who can benefit from extended endocrine therapy. Since being introduced to the Medicare schedule in 2024, we've seen 100% volume increase on these tests. We have a positive specialist growth, particularly outpatient referrals, which is 4% up. And we've commenced e-commerce and digitalization to collect upfront payments, and we've seen an increase in non-MBS payments being collected upfront, reducing write-offs. Collections have improved from 65% to 95%, and this includes new billing to compensate for B12 cuts. Slide 7. Thanks, Ellie. This slide gives a deeper dive into some of the bolt-on technology that I mentioned earlier. From left to right, the first box shows our electronic requesting, which is now 18% utilization. So there's room for improvement there and is integrated with all major clinic practice management software and over 39,000 referrers. The request goes straight into our lab system and improves order accuracy and reduce costs. It's available on desktop and mobile app. The second box is one we've been exploring for several years and is now really successful. Initially, OCR couldn't read doctors handwriting, but we've coupled it with AI and the solution can automatically enter pathology request forms. Over 50% of forms now fit into the current version with accuracy better than humans. The AI is continually learning, allowing us to increase the number of forms capable of removal from manual data entry. This will continue to reap benefits into 2027. On to the third box. This is about logistics efficiency and customer service. Route optimization software designed in 2019 has provided 150,000 kilometers a month benefit across the group, flowing on to benefits in labor productivity, car numbers and related costs. Futile stops have decreased by 50% with episodes per kilometer up 25%. We also have an Uber-like click to collect service for hospitals and practices for a better customer experience. They can order and see the cars coming on the app. We're now trialing driving cars with assisted software, 11 weeks in and the results have been excellent on this one. On to the fourth box, workforce planning via our digital platform has been in use since 2018 and predicts lowest cost roster for the skills required. The technology matches labor to volume and manages accordingly. Since the launch, the platform has provided 23% labor efficiency across targeted areas. Each year, we get better at forecasting and planning labor in relation to volume, which is particularly effective over Christmas, New Year and Easter periods. Again, this is evidenced in our labor ratio. Slide 8. Thanks, Ellie. We continue our ESG journey. The full report is available on the website, noting some of these are only measured annually. The one I want to point out today is our Phase II women in leadership training program, which involves high potential women prepared for operational roles in formal training as well as being mentored by senior female leaders to take on general management and potentially CEO roles. I'll hand over to you now. Thanks, Matt.

Thanks, Melinda. Ellie, turning now to the profit and loss for the first half. Overall, we delivered a higher underlying EBIT and NPAT in first half '26 despite the challenging market backdrop and in light of the decisions we've taken on our ACC and contracts portfolio, as Melinda alluded to earlier. Revenue for the half was $365.4 million, down 1% on the prior corresponding period. As we've discussed, this reflects our continued discipline in optimizing our portfolio. We've exited unprofitable collection centers and commercial contracts and alongside softer market growth, we'll continue to prioritize margin and returns over volume. Importantly, that discipline translated into improved earnings. Underlying EBIT increased 2.4% to $28 million, while the underlying EBIT margin expanded to 7.7%, up 30 basis points. The margin expansion was driven by the closure of loss-making ACCs. We've made that point a couple of times now. But on top of that, workforce productivity initiatives that better align labor with activity levels, ongoing benefits from technology and AI-enabled productivity improvements across our lab network. As Melinda alluded to, these actions more than absorbed inflationary pressures across our broader cost base. So this flowed down to the bottom line with underlying NPAT growing at 8.9% to $13.2 million, reflecting improved operating performance. Underlying earnings per share increased 12.8% to $0.067, benefiting both from the higher profitability and also the impact of our on-market share buyback. We'll continue the buyback into the second half. So in summary, these results highlight the resilience of the business even in a difficult market, our focus on margin discipline, cost control and productivity has delivered earnings growth, improved returns and strong leverage to a recovery towards long-term average growth in market volumes. On to the cash flows now. Thanks, Ellie. Free cash flow before interest, tax and financing was $21 million. That excludes the one-off AIC settlement payment of $6.2 million. Operating cash flow conversion remained robust with operating cash flow representing 95% of cash EBITDA. While this is slightly down on the prior corresponding period, driven by slightly lower EBITDA and also a small net working capital outflow, which we expect to reverse in the second half of FY '26. Capital expenditure remains well controlled. As we've outlined many times, our ongoing CapEx requirements continues to sit at around $8 million to $10 million per annum, and that supports any major improvements or replacement of our equipment and assets. Our strong balance sheet has allowed ACL to continue to return capital to shareholders. During the half, we returned $27.8 million in both dividends and buybacks. Income tax paid was higher in the half, and that just reflects increased assessed installments compared to the prior period. Overall, we have a strong track record of translating earnings into cash flow. We will continue to apply strong capital discipline while taking the opportunity to prudently optimize shareholder returns through capital management. To the balance sheet now. Thanks, Ellie. We continue to maintain a strong and conservative balance sheet, which underpins both our capital management strategy and our ability to invest through cycles. At the end of the half, cash was $22.4 million. Net working capital was stable, movements in receivables and payables largely driven by normal seasonality rather than any underlying change in trading conditions. Importantly, we saw a reduction in accounts receivable, some of which reflects continued focus on billing projects to reduce debtors and bad debts. Net debt, excluding lease liabilities, increased to $49.8 million during the half. This increase primarily relates to the funding of 3 discrete items, that being the AIC settlement payment of $6.2 million, $10 million of share buybacks and the payment of the FY '25 final dividend, which was $17.6 million. Even after these outflows, ACL still remains conservatively leveraged at less than 1x EBITDA. Our banking facilities, they mature in July '27, and we remain comfortably within all our covenant limits, providing significant balance sheet flexibility and funding certainty. In line with our capital management framework, the Board has declared an interim dividend of $0.0375 per share, and that represents 55% of first half underlying NPAT. The record date is the 13th of March 2026, with payments scheduled for the 31st of March 2026. Combined with the ongoing buyback, this dividend reflects the confidence in our long-term outlook. Overall, the balance sheet remains a clear strength of the business, supporting shareholder returns today while retaining capacity to fund growth initiatives. I'd like to address, while not on the slide here, the historical underpayments, which we disclosed in our ASX release today. While not addressed on the slide, as I said, just let me touch on the disclosure related to previous employee underpayments. We became aware of these issues relating to historical calculation and payment of certain employee entitlements. We were obviously disappointed to have discovered these and commenced a review supported by independent experts to determine the full extent and root cause. Payments, including interest have now been made to all identified current employees, and we have also commenced contacting former employees so they can verify their details and receive any amounts owed to them as quickly as possible. We take our obligations to employees seriously. And in line with our commitment to transparency, we proactively self-reported this matter to the Fair Work Ombudsman and continue to cooperate fully as the review progresses. We remain focused on ensuring all affected individuals receive any payments promptly and on strengthening our payroll governance to prevent similar issues in future. Handing back to you, Melinda. Thanks.

Thanks, Matt. On to Slide 14. Thanks, Ellie. Industry outlook. Targeted expansion of the tripling of the GP bulk bill incentive commenced in November 2025 and has started to show an impact to the GP bulk bill rate. We are expecting GP attendances to rise over the next 6 months. We've also provided some stats on this from the Medicare data for your information. It's early days yet, but the GP BBI seems to be having an impact as shown below in this slide. BBI growth was 66% in November and 84% in December. At present, as a result of reduced GP attendances, pathology growth continues to be below the long-term average. This is an upside opportunity as the BBI kicks in. On to Slide 15. This slide provides an overview of our growth strategy, which is 5 areas of focus. I have presented this slide before. We have conviction in our strategy and our ability to execute it. The focal point changes as we drive our programs and in response to opportunities that develop or are developed in the external environment. Today, I'm going to focus on 2 of these strategies in the following slides. We have a disciplined approach to network expansion. This is particularly evident this half with market volume reduction and evaluation of our portfolio. We've seen a reduction in revenue, but an improvement in earnings as discussed earlier. The effect of this restructuring has been a lowering of the point at which we achieved operational leverage this half. This will benefit as volumes return. Strategic partnerships. We have a number of partnerships and pilot programs underway aimed at diversifying our revenue and focusing on high-value, high-volume testing and innovative arrangements with pharma, CROs, biosciences and health funds. We remain focused on M&A opportunities, domestic acquisitions and adjacencies that are accretive. Again, here, we have discipline. These need to benefit our portfolio and be appropriately priced. We have a pipeline of acquisitions to grow our SunDoctors business as well as through organic growth, and I'll go into this a little later. Meanwhile, we are effectively deploying capital via our share buyback program. On to revenue initiatives. We've previously announced a key project to digitalize our billing process to enable upfront billing of patients. This is a project we commenced in financial year 2025, and we are seeing this start to pay off. We expect this to contribute to further EBIT improvement into 2027. The project required reprogramming parts of the lab information system to enable the upfront billing process, which is almost complete for many high-volume tests. We are targeting tests we already bill in addition to those that are currently unfunded by the MBS. Most of these tests we currently complete for free or we write off, absorbing the cost over many years. This project involves a range of revenue-enhancing activities, including digitalization of the billing process to recover unfunded patient testing, targeted upfront patient billing, targeted billing of unfunded tests that we used to absorb, non-Medicare billing and pricing enhancement and other funding enhancements. We are also applying AI to manual billing practices for greater billing accuracy and earlier receipt of collection. Operational efficiency. Over the years, we've implemented a range of tools and automation that continue to provide year-on-year benefits. I mentioned some of them earlier. On the next slide, I'll focus to the lab of the future, which is progressing and will add benefits commencing in 2027. Next slide, please, Ellie. The lab of the future capitalizes on our strategic advantage, the single LIS. This takes the learnings of COVID where we were able to move work efficiently around the country in a borderless manner, enabled by having the same lab information system in each state. Over 50% of routine work is to be processed in a highly automated 24/7 lab. The overall efficiency of national laboratories is estimated to increase by over 20%. AI, machine learning and robotics should significantly improve performance. It will have a progressive rollout through '27 and '28. On to Slide 17. Thanks, Ellie. This slide explains the benefits of refinement of our National Skin Cancer business with the creation of a state-of-the-art automated skin lab, combining the clinical and operational experience of our SunDoctors, Southern Sun and ACL businesses. We expect the cost per case to be reduced by 20% with efficiency in processing and diagnosis. We have appointed a new CEO for SunDoctors, who is experienced in clinic acquisitions and integrations. He will focus on driving our acquisition pipeline of skin cancer medical centers, which flow on to pathology referrals. We are also increasing consulting utilization and targeting innovative patient acquisition methods. There are plans to introduce AI opportunities to enhance workflows and support clinical service delivery, which is the new leader has implemented in other practices. There are also opportunities to increase non-Medicare services. I'm just going to mention CapEx now again. Matt mentioned we have a consistent CapEx requirement of $8 million to $10 million each year, which includes lab vehicle BAU, new collection center capital requirements and other related capital. We don't capitalize IT costs and the skin lab will be within this envelope. The lab of the future will require not more than $6 million of additional capital likely to be spread over 2 financial years. On to Slide 19. Thanks, Ellie. The Fair Work Commission has confirmed that there is gender-based undervaluation in the award covering pathology collectors and health professionals and ordered it to be rectified by way of variation to the classifications and rates of pay in the award. We have outlined the ruling here to date here. The increases and reclassification for some employees are still to be codified in a final decision by the Fair Work Commission. We have noted the collector impact here, and we are in the process of mapping this impact for 2027. We'll make this known when the work is complete. ACL is committed to ensuring our employees are paid fairly. However, the size and scope of the wage increases in addition to routine annual increments are such that the industry needs support from the government to avoid impacts on employment, patient access, patient billing and potential impacts on laboratory services and collection center numbers. Via our industry body, we have been working collaboratively with the Department of Health to reach agreement on an appropriate package of support via investment in the Medicare schedule. With no government support, we plan to offset the increased wage costs through other mitigations mentioned earlier and in the submission from Australian Pathology to the Fair Work Commission. Slide 20, please, Ellie. On to guidance. We are updating our guidance considering the first half '26 financial performance and the outlook for the remainder of the financial year as noted. The updated revenue guidance reflects the subdued pathology market in half 1 and expected market growth into the second half. It takes into account the performance in January and February month to date. As noted earlier, the buyback program will continue. We have a strong pipeline of initiatives that support a positive outlook beyond financial year '26 with at least $8 million of additional EBIT expected in financial year 2027 from the programs I mentioned above. Once we have a view on the financial impact of the Fair Work Commission ruling and our potential offsets, we will up the market at the appropriate time. Lastly, I've advised the Board of my resignation effective the 30th of August. I'd like to take this opportunity to thank our pathologists and scientists for their leadership and the broader Clinical Labs team for their passionate commitment to the service of our patients and referring medical practitioners. In particular, I'd like to recognize the Clinical Lab executive and broader leadership teams whose teamwork drive and innovative approach to the development of the business has been outstanding. It has been a privilege to work with them over the past years. I wish them and the Board all the best in the future as they continue to grow and develop the business. I'll pause now for questions. Thanks, Ellie.

So I'm going to start with a written question that came in on the Q&A from [ Justin Ramesh ]. I'll just read it out. Team, can you please elaborate on the seasonality of the business? Is it simply additional labor costs and penalty rates in H1 or something else?

Do you want me to take that, Melinda?

Yes, you can take that.

Yes, that's typical. So we typically have a second half skew. Thanks for the question. It's a combination of working days. It's a combination of busier months. It's a combination of GP preferences in terms of their work cadence in terms of when they're in clinic and providing services to their patients. So the pathology from the referrers tends to be more in the second half. And as we get further into the second half, we've got a couple of really strong months. Generally, February historically has been a very strong month coming back after people are away in January. There are more appointments there, and we get and we see more referrals. So we have more efficiency and higher volume in the second half generally and the profitability flows accordingly.

Now I've got some hands up to ask questions as well. So I'm just going to start with Tom Godfrey from Ord Minnett.

Can I just sort of kick off with Melinda, just some of your comments around the updated revenue guidance and it incorporating what you've seen in Jan and Feb? I appreciate it's only sort of 1.5 months, but could you give us any color in terms of what you have seen? Is it more of the same in terms of market episode growth? Or are you starting to see some incremental improvements?

I'll let Matt answer that one, Tom.

Yes, Tom, fair question because we confirmed guidance in October. It was a little choppy when we confirm guidance, but we saw the opportunity, hopefully, of volumes returning to normal growth rates. November was particularly soft. So I'm going back a bit further than you asked, but I think it's important to give context. November was very soft. And you saw that in the Medicare data. And then January was very soft as well, unusually so. It's usually a softer month just given people are away and GPs on holidays, as I referred to earlier, but it was lower than expected. The Medicare data isn't out for January, it will be out at the end of this month. But I would say November and January was unusual. February, looking a little better. I would say we're starting to see some green shoots and tick up in GP attendances that Melinda referred to earlier. So we probably attribute that to the bulk billing incentive starting to kick in. It's been -- we think it's probably lagged a little. And pathology will naturally lag anyway because people sit on their referrals for a while to get their blood taken. So I think that's probably the context into the revenue outlook.

That's great. Really helpful color. Just second question from me. Just around the optimization or the ongoing optimization of your ACC network. I mean I'm just sort of wondering how much is left in the tail there? Are there still opportunities for you to rationalize and take costs out or unprofitable work out? And sort of follow-up part to that question, is that making new ACC sites harder to come by given you've kind of got a higher hurdle rate now?

I don't think the hurdle rates have a changed, Tom, to be honest. So we've got an internal rate of return or margin that we target with every single ACC. And we do at every single ACC performance every month. To answer your question, yes, there is more that we can do. We chopped through a lot. But yes, there is more to do. A lot of those are in sort of remediation. We'll -- they may be below margin today, but we will back the owners or the operators to increase. And we work collaboratively with them to do that, and we have improvement plans in place on a number of them. So it's a diminishing number because we've done a lot in the last 12 months, but there is more to do. In terms of winning new ACCs, we compete on a range of factors for ACC, service, quality relationship and rent. There are certain providers out in the market at the moment who have been particularly aggressive on rent. And if they want to go and capture a part of the market that we deem unprofitable, we'll just retain our discipline around that, Tom, and not go there. And that's why we're able to grow our margin.

Tom, these ones were -- if you recall, after COVID, we back some practices for quite some time. As years go by, the costs go up, the CPI -- they get CPI. And when the volume doesn't go up, they become unprofitable over time. So it's -- some of them are a bit too small to be profitable now with the volumes as they are. So we always take a bit of a long-term view, but these ones have been a drag for some time. So we don't expect to be -- to see anything of that extent into the next half.

So the next on my list is Davinthra Thillainathan from Goldman Sachs.

I guess I just wanted to follow-up a comment that you made, Melinda, about the historic underpayment and sort of undertaking a review looking at the full extent of it. Can we just confirm, do you expect further cost to occur as a result? Or have you taken most of that cost in that first half period?

I'll take that. Thanks, Davin. Yes, I don't know is the answer. What actually happens, Davin, so we discovered the issue and then we interrogated the issue and that resulted in back payments being made to employees. What that means next is, is that we will look further to see if there are any more underpayments, but we haven't undertaken that work yet. So I can't say whether there will be more to come or not at this point in time, but we are continuing to look the work will continue.

Yes. So can I then confirm given you have earnings guidance out today, does that guidance exclude the potential for further costs? Or is it -- if there's further cost to come, it would just be taken below the line? Is that the way to think about it?

If there were further costs, if, they would be taken below the line on the basis they relate to prior periods, Davin.

I don't think -- this is part of our internal audit program, and we were auditing our payroll function. So I think the fact that we've been proactively auditing our payroll function is why this has been discovered. I wouldn't say that we're any different from a risk point of view to any other company in terms of potential overall underpayments personally, but we're doing -- we're remediating what we've seen.

Yes. And somewhat -- I guess, well, not really related, but somewhat thinking about your labor costs into FY '27. The gender-based undervaluation, thanks for providing the disclosure as to what you think the '26 impact is. If we sort of annualize that impact, it looks broadly in line with what the Fair Work Commission had produced in terms of their estimates when they sort of released some direction on this. As part of that release from the Fair Work Commission, they also talked to the impact the industry would see from the health professional speed and there's some, I guess, numbers that they put out publicly. Given your experience on the collector side seems to be broadly in line with the FWC, can we assume the same for the health professionals bit?

You can assume whatever you want, Davin, if you want to benchmark it against Fair Work. I mean this isn't necessarily involved process. What it means is you need to go through employee by employee and there's thousands of them, find out what the credentials are, their work experience, both within ACL and outside of ACL in order to map them to the correct level. So it's a necessarily painstaking process in doing this, and we take it seriously because we're talking about people's pay. So I won't comment as to whether we think it will match what the Fair Work Commission has put out. We'll do our work. And once we know what the number is, we'll advise the market.

Okay. One final one for me. Could you talk to the progress of your EBAs in Victoria? I believe that was under underway the last time we discussed this matter. Could you provide us an update there, please?

The collectors one was extended for 12 months, Davin. And there was an outcome there in line with our expectations around increases under that EBA. The other health professionals or what we refer to as the scientists and techs EBA was parked in light of the impending gender undervaluation decision that was going to come out of their work. So that remains outstanding.

So moving down the list on to Craig Wong-Pan from RBC Capital Markets.

Great. Just with the comments that there are some other ACCs to rationalize given their profitability. I'm just wondering if you could comment on when we might see your revenues grow in line or better than the market? Like is there another half or so that you could grow below the market? And then after that, we might see improved growth. Could you just provide any comments there?

I did make the comment, Craig. I don't think you should be assuming that 100% of the market that you're looking at in the Medicare schedule is profitable. So there's a fairly reasonable proportion of the market that isn't profitable. So we continue to look at our bottom line as well as our top line, but with a view that we won't obviously waste shareholders' money by going into contracts and agreements that basically cost us money. So that's kind of my overarching response to that, but Matt might want to have a more detailed answer.

I don't think it's that much more detail than that, Melinda, and I agree. Look, ACL has got a track record of doing what it says in this regard, Craig. We just don't grow for growth's sake. It's just not part of our strategy. And so we don't flinch when rents go up or we're competing for out-of-market properties. So whilst there is some underperformance in a smaller percentage of our cohort, we'll work to improve them. But I'm not sure how relevant is in terms of growing relative to sort of market or system growth because as Melinda points out, there's a large chunk of that system growth, which is unprofitable. If you could actually -- if you could carve that out and ask how are we growing relative to profitable market growth, I think we measure up quite well.

The other thing, Craig, we expect that we've got a really nice sneak base now. So the market volume is really poor for everybody. So as it grows back organically, we expect to get that -- have that more of that going to the bottom line than if we had kept those collection centers. So the vast proportion of our 1,300-ish that we've got now are doing well.

And then just wanted to understand a bit more about those ACCs that did become unprofitable over time. Are you seeing kind of trends more towards larger ACCs? Is this just like the general trend of kind of consolidation of volumes going to larger ACCs? Or is there anything else within that?

The smaller ones are generally not very profitable anymore. So maybe 4 FTEs generally not very profitable. And we support groups and we support practices that have got track records of improving, but some of them, when they don't improve over a period of time, we will say we're not going to stay there. And particularly when they don't improve over time and we have a low market volume, it just escalates the poor performance of those -- that small cohort for us. But in the market, the load growth that we've got now will be for everybody's collection centers that were okay, marginally okay, will be poor.

Okay. And just last question. You mentioned that Pathology Australia is trying to lobby for more government support. I'm just wondering if you could talk about anything that you're hearing on that front? I mean, is that gaining traction? Yes, could you make any comments there?

I probably don't want to give any more detail, Craig. But we have -- in the Fair Work Commission submission, we -- which is public, we talked about the impact on the industry if we are -- if we don't get government support. And we've got a plan in place for what we will have to do. And the government is aware of what we might have to do because we're not going to just absorb these costs without taking some action. So we're hoping that the government is understanding of that. And I probably don't want to, at this point in time, talk about any discussions with the government.

Next in the queue is Andrew Goodsall from MST. Okay. I might just put you back on mute. There's a question in the Q&A. We'll move to instead. Question about the buyback scheme. So will management prioritize accelerating the share buyback program over dividends given the substantial EPS accretion available?

Matt, do you want to get that one?

Yes, sure. So the question was the componentry, the proportion of buyback versus dividends. I've been asked this question before. Look, we'll review it constantly. At the moment, we're doing both, and we think that's appropriate. There's a cohort of shareholders that like the dividend, whilst we acknowledge that the accretion from buying back shares is attractive as well. So capital management remains fluid in management size and certainly flexible just given we've got the capacity to do it, which is why we're doing both at the moment. That's as best as I can answer that, I think.

Okay. Andrew, I'll give another go to take you off mute.

If this should work, can you hear me now?

I can hear you now.

And I was just echoing other remarks -- sorry, wishing Melinda all the best for the future. I appreciate your leadership with the business today. Maybe just a quick one, just picking up where Craig left off, just on the new initiatives that to overcome, I guess, some of the new costs. What percentage of revenue would be out of pockets now for yourselves? And where would you expect that could get to?

Are you talking about sort of private non-Medicare? So individual...

Yes, whether it's non-Medicare or whether it's co-pay.

Yes. I mean private patients account for 8% of our revenue mix, Andrew. We'd expect that to start going up with the private billing initiatives and Melinda has talked about this both at this result and previous results, and that's basically recovering payment for unfunded tests that we've talked about in the past. So there are a number of initiatives to increase that. So we would expect over time as they come online to increase the proportion of private payments relative to our overall take of revenue.

Okay. And so for instance, right now, someone comes in for B12, would you be billing them? And again, just kind of it doesn't sort of seem to appear, but accounts receivable sort of seem pretty solid. So presumably you're getting paid?

It's getting better. I mean it's an interesting one. So if you take an upfront payment, Andrew, then it never goes into debtors, and we're never chasing a bad debt. And so what happens is -- and for those who we don't collect upfront, the accounting is that you start provisioning for it over the course of the year, the longer it ages. So what actually will happen over the course of the next couple of years as we instigate more of this is you'll just see the provision come down because we'll be collecting more upfront. But there will be a bit of a lag in that. But over time, you'll see our debts come down and a better cash conversion. Now the question around that is, well, we've been asked before, do patients walk away from the payment. If we ask for an upfront payment, the reality is if they walk away, we probably would never have collected the money anyway.

Andrew, that cohort that Matt just referred to is actually not very big surprisingly. Just on the B12, not particularly the B12, but it's the -- one of the focal areas is, is where we have Medicare conditions and the patient doesn't meet the conditions. And the conditions are either time-based or condition-based, symptom-based. And as applies to B12 and other tests, if the patient doesn't meet the Medicare coverage because of the conditions, those are the ones where they're unfunded. We used to send a bill after we've done the test and the patients didn't pay or a lot of them didn't pay. And now we're saying to the patient, you aren't eligible for Medicare, and we're collecting that upfront and not as many as we thought are walking away at the front door, but those people won't be covered by Medicare in any practice.

And just in terms of rationalization of your collection centers or eliminating the underperforming ones, when I look at the cash rent expense on Slide 23, sort of holding flattish year-on-year or down a little bit actually, I guess, from the second half. Just where you sort of expect that operating lease cost to sort of go down to with your rationalization?

Sorry, just to repeat that. You're asking what the operating lease AASB 16 [ indiscernible ] will be?

Yes, exactly. Yes, it was $67.1 million. Just wondering whether you sort of -- that's sort of a representation of where you were.

Yes, there hasn't been a lot of difference. If you look at -- if you combine the AASB 16 depreciation with the property cost line. And just to be clear, that property cost line in the P&L refers to leases that are inside 12 months due inside -- expire inside 12 months or leases in holdover plus the AASB 16 interest. If you add all those up and compare them period-on-period, it's gone down a little bit. With that, if we continue to rationalize, I would expect sort of a correlation in reduction, if you like, in that expense.

Okay. So I was just trying to sort of see where your run rate might be at the end of the period and that sort of more like a $66 million or something like that now?

I haven't modeled it discrete, to be honest, Andrew. Yes.

No problem. I think directionally you can sort of see them where the numbers are moving.

Yes. That's right. And that's the way I'd be thinking about it.

Yes. And just final one for me, just back on the phlebotomist again. Just so I've got this right. I mean, essentially, the annualized cost looks like it's sort of 4x $1.8 million. Is that -- and then plus whatever it needs...

Let me stop you there. It's 4x $1.2 million.

$1.2 million, yes, sorry, I got the number there. Yes.

Yes, $1.2 million, just so we are clear. That's why -- that restatement only allow them long service, balances only happens once to bring them up. So if you go -- I mean, sure, 4x $1.2 million is fine. What I would say is that $1.2 million is a raw number. That is before ACL is applying any offsets or operational response. And I think what's important to consider is that we're not going to sit on our hands. If the government won't fund this through the MBS, and we made this clear in our disclosures, we'll obviously work to offset that cost through operational measures.

And I know you responded to the Fair Work Commission issues for, I guess, broader health workers, but there was a reference to additional cost for the phlebotomist from January next year. Do you have any view on what...

I don't have any color on that. And it was a strange one. So I don't know whether they're just keeping their options open, Andrew. But basically, they've codified the schedule of uplift and change. So as to a new table or a new rate card as of 1 January, I'm in the dark.

And now to [ Sasha Crean ] form [ E&P ].

Look, just interested in your comments around the weaker market growth into Jan and Feb. And I'm just wondering how much is sort of the continuation of the cyclical factors that are probably going to continue throughout the year versus, I guess, more structural type factors like GP attendances and what you're sort of thinking into '27? Are we going to pass a lot of these factors and get back to a more normal rate of growth?

Well, the Medicare stats for the GP is probably the best place to start. So the GP attendances are down partly because of GP supply and partly because of cost of living issues. And so the government put in the bulk billing incentive tripling. And we've seen an uptake of that opportunity by practices, which I think is on the slide -- one of our slides so that you can track that Sasha. And so the bulk bill incentive has been taken up more since November. We aren't seeing that in the GP attendances yet, but we should get the Medicare data over the next month that will show us whether that has made a difference in attendances. So we think the BBI, the GP BBI will allow more patients to see GPs and then the GP attendance rate will increase and will flow on to pathology. Quantifying what that is, I need a bit more data from the -- we've only had 2-3 months of the BBI increase. I can't -- unless Matt's got something else he wants to say. I can't really forecast what that's going to be. But what we're seeing at the moment is very, very unusual. And that said, we've still had an increase to our bottom-line measures. We've also -- we also think we're in a really good position when the volumes start going back, even 1%, 2%, we're in a really fit position as a business to take advantage of that. So forecasting those volumes and when they'll come back is probably not something I can do, but Matt might be better at it than me.

Yes. I don't want to be heroic. Yes, I think just building on that, Sasha for a minute. I think probably what you saw initially with the BBI incentive when it came in, in November, and it was sort of ramping up into a traditionally quiet period anyway over December and January. So the data isn't great. It's a bit dirty, is you would have initially seen some cannibalization of private billing, right? So you would have seen people who go to see a private billing doctor probably go to the bulk billing doctor taking an appointment. So with the expansion of the bulk billing incentive, there is probably more practices that are taking it up and you have more appointments. So you see probably private patients moving into other appointments. So no net increase initially. I think over time, I think we're just starting to see this in February is actually a raw increase in the number overall as people can access more appointments and probably more shorter appointments as well. People who a chronic deal tend to go to the doctor anyway. But for people who can get to the doctor and maybe didn't want to pay a private co-pay can now get an appointment. So I think there is a tailwind. That's my view. But like Melinda said, forecasting is difficult.

Yes. No that's helpful. And just in terms of competitive dynamics in the market, just wondering if you can give us like rough guidance on what you're sort of seeing in terms of pressure on property and lease costs on an underlying basis when you sort of strip out the ACCC -- sorry, the ACC savings that you made without giving actual numbers. I'm just wondering how competitive the market still is for those ACCs that you actually want to retain?

I think it's always been competitive. But Melinda, do you want to comment first?

Yes. I think we need to focus on profitable revenue and compare growth, as I said earlier, growth, market growth, growth in businesses and the profit outcomes for -- to evaluate performance. So it is competitive, but we're not competing for the unprofitable part of the market. So I probably don't have anything additional to say than that, Sasha.

Yes. I guess I'm just trying to get a sense of whether -- I mean, obviously, the market has been extra competitive for a while. Just trying to get a sense of whether that may start to fall away a bit and reduce the pressure on the footprint that is profitable.

Well, we have to see what happens. We've handled the B12 cut really well. That would have been a $14 million drop for us. Part of the way we've done that is through upfront billing and collecting our payments upfront, not having them flow through to debtors and then be written off. So it remains to be seen what the impact of that fee cut has been on our competitors and how they stand from an earnings point of view. So we've -- that $14 million that we put into -- we got back for some of the $14 million that we got back for the fee cut would have probably gone straight to the bottom line. So we'll just keep doing more of that. The private billing, obviously, is really goes to the bottom line. So the more we can bill the work that we're not being paid for, the better will be off, and we've set ourselves up to be able to do that.

Just one clarification on that point. In your revenue bridge, when you talk about $3 million of other growth revenue initiatives, is that the sort of non-MBS test volumes and price increases that you're talking about there?

There's a bit in there, Sasha. So it's other businesses, other initiatives, yes. And it's non-MBS, correct.

So this will be our last question, which is another online question in the Q&A. I'll read it out. Have our collection center rationalization and EBIT initiatives had any impact on our relationships with medical professionals and GP referrers?

No. Not -- that's not that I can comment on. No.

Okay. So that's all that we've got time for today. Thank you, Melinda and Matt, for your presentations, and thank you to all of our participants for attending and showing such an interest in ACL. And we hope to see you at our next investor webinar later this year. Thank you very much. Goodbye.

Thank you.