Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you, everybody, for joining us at short notice this morning. Welcome. Welcome. This conference call, obviously, is in relation to the ASX announcement this morning and presentation which we've lodged around our Medical Centre sale and a trading update. So with me today, I've got Malcolm Parmenter and Maxine Jacquet. And I'll hand over now to Malcolm to just run through the highlights of the presentation for you.

Good morning, everybody. And thank you for joining us today for this call on the sale of our Medical Centre business and also we took the opportunity to give you a trading update. As I said in the release today, this is a big moment in the history of this company as we were founded as a medical center business by Dr. Ed Bateman in 1985 and have grown that business to over 86 medical centers, including the Health & Co clinics. And over the past few years, as you probably know, we've transformed the operations of the business with new and extended patient offerings, more flexible doctor contracts and updated facilities and systems. However, as we indicated in our half year results call, we believe now is the right time for this business to move into private hands. And I'm confident the Medical Centre business will flourish backed by the financial strength and extensive investment experience of BGH Capital. For Healius, the sale is consistent with our strategy of simplifying our portfolio and focusing on our leading and scalable diagnostics and day hospital businesses. We're also confident that it will strengthen the company, free up capital for investment while enabling shareholders to realize the value of the Medical Centre business, which has not been fully reflected in our share price. Right now, I won't go into too much detail on the sale itself, other than to say it's been achieved at an attractive valuation for us, which is testament to the quality of the business and the unique footprint of clinics. Importantly, for the remaining Healius business, we've negotiated long-term leases for our Pathology and Imaging at rents consistent with current levels, and we don't anticipate any leakage of Pathology or Imaging revenue, provided we continue our levels of service. As you will have noted, given the disruption in dental activities due to COVID-19 restrictions, up to $75 million of these proceeds may be deferred if the earnings of the dental clinics did not return to pre-COVID-19 levels at the time of completion. However, early trading indications are very positive as our dental operations are rapidly returning to pre-COVID revenues, and we are confident we'll receive a full amount, if not at completion, then within 12 months after completion. On an important side note, we retained the rights to the income tax refund totaling approximately $70 million. That's including interest. This is to do with the court case on the treatment of health care practitioner lump sum payments for the financial years 2003 to 2007. Now there are a couple more slides there about our strategy and where we are and why focus on our diagnostics businesses and, in time, our day hospital businesses, which you can read at your leisure rather than me take up all the time reiterating that. So we've got some time for Q&A this morning. But in terms of a trading update, there's a few points that I'd like to make. One is that we have rapidly deployed testing capability for COVID-19 throughout the country. In fact, we have supported this from the beginning. And contrary to some media coverage, we were doing the tests when we basically were receiving no payment for it, and we're committed to that because that was the right thing to do for the Australian people. From mid-April, we've seen good growth in our diagnostics businesses. So a rapid decline as we indicated early on, but then a rapid rebound in terms of where that goes with our Pathology business close to last year's numbers in the last couple of weeks and diagnostics back to single digits down on last year and continuing to recover. The day hospital business has -- is recovering quickly in terms of where it's at. And it's on a state-by-state basis. There's different rules and regulations apply to volumes in private hospitals in different locations. But recovering quickly, in our dental business, we've seen in the last 2 weeks revenues above last year. So recovering quickly, and it's not -- we haven't opened all the sites as yet. Our IVF business has strong demand, and it's rapidly ramping back up to pre-COVID levels at this point. Obviously, the future is still uncertain in terms of where that goes. So -- but right at this point in time, things are picking up quickly. In our Medical Centre business, revenues in Medical Centres have been strong throughout the pandemic at this point, largely underpinned by telehealth services which have contributed a significant percentage of the revenue in our Medical Centre business. So I mean, right at this point in time, the business is recovering strongly. We're confident, as we've said in our last update of achieving bank gearing ratio pre the Medical Centre sale below 3.0 at the 30th of June 2020. And we have in the last week, in the last couple of days really, successfully renegotiated the first tranche of our debt facility with extension of $70 million to $570 million, and that's due to complete by the end of June. So the future for Healius without the Medical Centre business is, as a leading diagnostics business and day hospitals business, we believe this is the platform that gives our shareholders the best growth opportunity and the highest returns, and it will significantly strengthen our balance sheet. And it's been part of our strategy now for the last 12 months as we work towards growing our diagnostics businesses, and, in time, our day hospitals business.

Thank you, Malcolm. We might now hand back to the operator, and turn over to you guys for Qs, Q&A. Thank you.

[Operator Instructions] Your first question comes from Saul Hadassin with UBS.

Malcolm, Janet and Maxine, just a quick one. In terms of the sale of the asset, can you talk about whether there's a gain or loss from the carrying value and what the implications are for the goodwill?

Max, do you want to take that?

Yes. So there will be a loss on sale. And we're expecting that to be in the order of around about 130 -- around $130 million. So that will be -- become apparent at our full year results.

Okay. And is there -- is that tax deductible? Do you know yet?

Sorry?

Will that be tax deductible? Were there tax implications about that loss?

No.

Okay. And then separate, Maxine, just the lease -- as it relates to what's going to happen with the lease costs and also AASB 16, so were all the medical centers owned by Healius or were some rented separately?

No. They are rented.

Okay. And then you now recognize the lease costs from a cash perspective of the Pathology collection centers and Imaging practices?

Yes. That's right.

Okay. So there's no net offset for a reduction in -- so there will be a reduction in lease cost as it relates to the Medical Centres?

What do you mean, a reduction from the lease charges, which are sitting with Pathology?

Yes.

Yes. We accounted for it completely separately. The Medical Centres will go forward with their own lease costs under AASB 16, and that will be accounted for separately for the -- both the Imaging and the Pathology business, which are completely separate.

Okay. And then just finally, Malcolm, you mentioned no real loss of referrals, particularly as it relates to Pathology and I guess Imaging too, but just your confidence in GPs within the Medical Centre business continuing to refer the same quantum of work to Healius Pathology and Imaging, what gives you that confidence?

Yes. Look, I think, I mean, largely, the referrals come courtesy of the location of the collection center and the imaging center within the facility. And that -- none of that changes in this. So I mean, effectively, we will have a long-term relationship with the purchaser of the Medical Centre business and some service-level agreements around what we need to provide. So we're confident we can retain that in the same way we have in the past. Look, the reality for GP is even if you own the Medical Centres, you can't and we wouldn't try to direct where they send their referrals. All we can do is to provide a service which attracts their customs and that's what we will continue to do. So none of that changes.

Sure. Just back on your AASB 16 question, don't forget our half year and our full year, we will be showing our figures. Our UNPAT figure is, pre-AASB 16, we're taking advantage of a transitional arrangements and showing the figures before for this year because we haven't adjusted prior year. So the question on the change in the leasing, that will be done as a sort of a separate slide -- it's pre-AASB 16 for this year. And then next year, we'll swing into post 16. And obviously, that will be without the Medical Centres in both cases.

The next question comes from Andrew Goodsall with MST Marquee.

Just in terms of cost elimination at head office. If my numbers are right, you've sort of sold about 16% of your EBITDA -- sorry, EBITA. But in terms of your allocation, your time and your cost at head office level, just trying to get a sense of the materiality of what this sale means to you?

Yes. So Andrew, thanks for the question. Look, we -- as you know, we've been working through our support cost base across the whole business. And we will continue to do that. What we have is the transitional services agreement to Medical Centres. So there will be a support base which goes across with the sale, and that will be for a period of 12 months. So over the -- assuming that completion takes between 3 and 6 months, we're expecting that there will be a 15 to 18 month time period to work through the last of those costs so that we get to a right size of the support cost base of what's left in the business.

And do you have a sort of sense of proportion of sort of how much costs were at head office level, so we're -- I'm just trying to get a sense of where the savings will come through back in the remaining business or ongoing business?

Well, look, we're working through each of the areas now. We're not anticipating a material shift to the other divisions at this point in time. So we're not expecting a material change there for Imaging, Pathology and day hospitals.

Okay. Terrific. And just in terms of just your capacity post transaction for -- to look at acquisitions or any other opportunities, could you give us a sense of how you're thinking around your capital capacity for sort of future expansion?

Yes. Look, I mean, obviously, this is about supporting -- a part of the strategic rationale is to support growth in both Imaging, Pathology and eventually day hospitals as well. So part of this is about paying down some debt. But it is also about looking at how we invest in those core businesses to grow. So it will be balanced. And as we go to the full year, we'll talk about each of those businesses and what we see as the potential being.

Your next question comes from Lyanne Harrison with Bank of America.

Malcolm and Maxine and Janet, if I think about just in terms of your trading update and looking at your Pathology business, you mentioned that it was probably back on track to where it was last year. Has that been just over the last 2 weeks or has that been longer than that?

Look, it's been a long, fairly slow -- seemed slow at the time, but probably reasonably quickly given -- looking backwards. But it's gradually -- look, it's gradually come back up from about the beginning of April, but just slowly ticked up by 2% a week, something like that. That's sort of number is what it was coming at. And it's -- the economy has opened up and the fear of COVID has lessened than people's willingness to participate has come back. In terms of usual care, that's still down a bit on where it was the same time last year. But that's then compensated by the additional COVID-19 testing that's going on at the moment.

Okay. And then if I look at like Medical Centres, you mentioned telehealth was underpinning your Medical Centres' revenue. Other than the initial disruptive weeks, would you say that Medical Centres, whilst it's still under Healius ownership, is back to, I guess, pre-coronavirus levels at the revenue line?

Yes. Look, it's pretty much back to a revenue line. Patient numbers are still lower than they were this time last year. But the thing that -- there's a range of reasons for that. There's patient numbers. I mean when you isolate people for coronavirus, you also stop them from getting just about everything else, like colds and influenza. And so you see that kind of change happening as well. At the same time, the federal government has doubled the bulk billing incentive, which improves revenue. So within the Medical Centre business, it's back to roughly in line or maybe a little bit in front of where it was this time last year, but growing slowly week on week. And telehealth is making up -- it was well in the 30s, it's now high 20s in terms of the percentage of services that are conducted by telehealth within that business.

Okay. And just one final question on rent. Did you manage to negotiate lower rent across your portfolios, including Pathology and Imaging, over the coronavirus period? And if so, is that back to normal rents now? Or is that going to be for a longer period?

No. Look, we -- as we said earlier, we asked our landlords at pathology collection centers around some rent abatement or reduction over that period of time, and that was for a 3-month period to the end of June. We expect that those rents then would return to normal.

The next question comes from Han van Boon from Robeco.

Just a couple of questions on the bid from partner group. What is the standing there given the sale of the Medical Centres? And then, the brand, Healius, is that -- that stays with the Medical Centres, I assume, so you would need to rebrand the other businesses, is that correct?

No. The other way around, Han van. The BGH will have a license to use the Healius brand for 12 months. So there'll be a rebranding there. The important thing to remember there is that very few of the Medical Centres are actually branded Healius in terms of their -- as far as their signage or anything else that exists within them. So it's not a massive job to rebrand the Medical Centre business. So that's where it is. Look, we don't really have anything to add on the partners bid. I think we've pretty much said everything that's there to be said.

The next question comes from David Low with JPMorgan.

First, if I could just start on the testing. Could you talk a little bit about what you're seeing in terms of how many tests is Healius currently providing? And do you think that current levels can continue on for much longer, given where we're at?

David, look it's -- in terms of where we are right at this point in time, that part is easy, we're doing 7,000 to 8,000 tests a day across the country. That varies up and down. If you have -- like they did in Victoria and then more recently in Western Australia, where a state government decides to run a testing of well people to try and get an idea of whether there's any undetected coronavirus in the community, then those numbers will spike for 2 or 3 or 4 weeks, however long they run the program for. But right at this point in time, what you see is that basically anybody with upper respiratory tract symptoms is being asked to have a test. And we've opened drive-through testing centers that have proved very popular all over the country. So that -- look, I would expect that, that sort of level of testing is likely to continue. And I think if we get further into winter and you've got more colds and upper respiratory tract type infections and you've got schools back, which tend to be -- maybe they don't spread coronavirus there, but they certainly spread colds and various other types of sore throats, right? That's for sure. Anybody who's got kids who will know that's the case. And all those people need to be tested then look, conceivably, it actually increases. I think that kind of testing will need to continue for some time, I suspect.

That's useful. But I mean if I use 7,500 tests a day, you're generating over $20 million a month. Now that equates to about -- on a 6-month basis, that's a 25% uplift in Pathology revenue. So frankly, if this continues and even if we're talking about the month of June, it strikes me that you should be ahead of the same time last year, unless I'm missing something.

Yes. Look, we -- the more normal pathology testing is behind where it was last year, so that's to the extent of the size...

Not 25% behind, is it?

No. Not right at this point in time, that's true.

Yes. No. It just seems like quite significant boost to what is Healius' bulk of the business, particularly after this transaction. So short term, sure, but a real contributor.

It's quite expensive, though. It's a lot more expensive testing regime than what normal pathology testing is. So from a margin perspective, it doesn't translate that way.

The margin perspective is dilutive?

Yes. It would be. Yes.

Okay. Just shifting to a couple of other topics then. The day surgery business, can we talk a little bit about how that's performing? And particularly in light of the announcements from Ramsay on government support programs, what's Healius position with that and where is that business at relative to the same time last year?

So for the Montserrat business, we didn't sign a viability agreement for that business. And it's back to about -- well, it depends on the state, but it's heading rapidly back to 80%, 90% of where it was pre-COVID. And we would expect that would continue to get back to normal levels. So that's where that part of the business is. For the former Healius day hospitals, of which there are 4, they have signed viability agreements for those.

So they go from losing money to breakeven through this period?

Yes.

Yes.

Yes. Okay. I just had a couple of other quick questions. The rental payments, the intercompany rental payments in the Pathology and Medical Centre business, historically, it always struck me that Healius paid quite high rents in that internal transactions. And one could understand why that might be. Just in terms of the deal that's been struck now with the new acquirer of Medical Centres, how does the rental payments compare with your average commercial term payments to other GP practices?

Look, there's a mix there, the same as there is elsewhere. I don't know. I don't think they're materially different to the average elsewhere. I mean, collections that are rents in large Medical Centre sites, wherever they are, tend to be pretty highly priced, I think, across the whole of Australia, particularly in Sydney, Melbourne and Perth. That's -- I don't think they're materially different elsewhere. There's a range there, but we don't know.

But in the historic accounts, intercompany transfer rates, would that be indicative of the rental rates going forward?

Yes. It would be.

Yes.

Okay. I've got one last question, sorry to drag it on so long. The IVF business, what's your thinking there, Malcolm, with what you want to do with that business? Is that core to the remaining Healius? Or is that something which is noncore?

Look, it's a good partner for day hospitals, there's no doubt about that. So those 2 businesses fit well together. Look, at this point in time, that's where it sits. We continue to build its profitability. So we've been working hard at how we monetize that business from where it is, and that's going well. So look, right at this point in time, that's not on the horizon.

The next question comes from David Bailey with Macquarie.

Just from me, I was just wondering if you're able to give us a bit of a sense as to how much of the revenues within Pathology and DI was sourced from Healius Medical Centres?

Okay. It's about 8% of Pathology. And Imaging is -- yes, about 30%. But lower margin for Imaging.

Okay. That's helpful. And just now with the balance sheet, obviously, being in slightly better shape, were there any organic growth initiatives that were put on hold due to overall other balance sheet pressures that might start to come through over the next 12 to 18 months? And if so, can you just give us a bit of a sense as to what you might look to do?

Sorry. Most of that I heard, we just missed the what growth, sorry?

Okay. Organic growth initiatives. Anything you're looking at doing from an organic growth perspective that might have been put on hold that you might look to implement over the next 12 to 18 months?

Well, look, there are a range of initiatives in each of the businesses. And as we're finalizing our planning, there -- believe, I just talked about earnings. For next year, there's a pretty dedicated effort, both across Imaging and Pathology, looking at perhaps how we can reset the cost base and look at the networks of both of those businesses and see what we can rationalize potentially out of each of those businesses and look at the cost base going forward. So that's more of -- that's obviously on the cost side. And our initiatives that were included in the SIP program being the cost base continues, and we're now looking at revenue initiatives in each of the segments across the businesses per our normal planning process. But there's nothing significant that I could point to at this point in time, but certainly looking pretty heavily in each of the businesses is what commercial contracts we can win.

And that balance sheet question?

So we'll give you a lot more detail at the full year results, Dave, really on...

Yes. I was just asking, where I was coming from, now the balance sheet flexibility, it just gives you flexibility to pursue those with that restriction that you might have had otherwise. Is that fair?

Yes. Certainly, yes.

Yes. Look, we see there's opportunities across each of our businesses to do that. And as Janet says, we certainly have some plans there, which we'll talk more about in due course.

And then just a final one for me. Just net debt, where that currently sits, it was $746 million at the first half results. Just wondering where net debt is mostly currently.

Well, we're not giving -- we'll give that at the full year. We won't give that today, if that's all right.

Your next question comes from Chris Cooper with Goldman Sachs.

Just on the $75 million component, apologies if I missed it, I was a bit late to the call, but can you just walk us through the dynamics there? So I understand you have to get back to pre-COVID earnings levels by the time of deal completion. How are you defining pre-COVID earnings levels there? Is that the average of, say, 2019 calendar? Or how are you sort of measuring that? And what happens if you don't get back? I mean I noticed that any outstanding balance would be paid over 18 months following completion. If we don't get back to pre-COVID levels in the dental business, is that $75 million then not paid? Just a bit more color on that, please. And on the core business and your leverage target of 3x for the year, can you just clarify for us, please, the nature of the government support that you're receiving? I mean I guess certain components of the business would have been eligible for JobKeeper. But I guess other components wouldn't have been. Can you just talk us through the size and the mechanisms by which that government support is working for you? And just lastly, on the COVID testing piece, I noticed your comments there on COVID. You are saying 7,000 to 8,000 tests per day currently. Can you remind us what your volumes are as you stand today across the whole Pathology business? And part B of that question, I assume that 7,000 to 8,000, that's all PCR testing? And if so, do you expect serology testing to play a role going forward? Or do you think it's not necessarily going to be that meaningful in Australia, given we've had a relatively low prevalence here?

Okay. I'll cover it. So let's talk about gearing first. So look, as we've said, we are targeting gearing below 3, and that is -- depending on the final couple of weeks of June, we're pretty confident of getting to that point. And so was there anything else that you wanted to know on gearing, sorry?

Government support.

Oh, the government support.

It was more a question on the government support mechanism. Because on my numbers, I can't get to your gearing target without government support. I just need some guidance, I think, on how meaningful that is.

Yes. We'll obviously go through that more in more detail at the full year, but it will be for -- particularly for pathology for the month of April and likely the only month that support will be there. And that was on the basis of an agreement that was struck with the government around the level of COVID tests that we're doing. And there is a fall there in terms of our volume from last year and where we were trading, so...

Yes. So that's really the only one, Chris. You mentioned about JobKeeper. I mean the path was sort of a quasi JobKeeper. We only got JobKeeper in a handful of day hospitals. Otherwise, the business didn't get JobKeeper, so we got some past default which was equivalent to JobKeeper, as Maxine said, for April. And it's [indiscernible].

Well, we actually would have been a lot better under JobKeeper in Pathology if we've had that. But we didn't have that. We obviously didn't have JobKeeper for Imaging either and then just the Healius day hospitals, the day hospitals package, so that is the total there. That's the total level of government support that we've received.

Okay. So pathology volume, we have answered that one?

Yes.

So look, it varies up and down depending on the day of the week. But I mean, it's roughly 65,000 to 70,000 tests a day on weekdays. That drops down a bit on weekends, of course, roughly the number.

And sorry, Malcolm, that includes the 7,000 to 8,000 you're doing at the moment in COVID?

Yes. That's sort of current volumes. So that's about where it sits, which is about the same -- it's probably the same sort of number that we were doing previously.

In terms of COVID, it's all PCR testing.

Yes. So that's all PCR testing at this point. In terms of serology, look, it's hard to say where that goes. My understanding of the science behind that is that there's still uncertainty about whether an antibody test -- a positive antibody test whether that confers immunity. And even if it's negative and somebody's had coronavirus, whether they might not be immune anyway, I think there's still a bit of work to be done around that as to whether the idea of, "You can test for it after, and that's positive, and therefore you're immune to coronavirus." I think -- I mean, logic would suggest that is the case. But I'm not certain that, that's proven at this point in time. If it gets to that point where people get immunity passports off the back of serology, you will expect that they would be testing for that as well. Serology testing though is an automated test on a lab platform and certainly much, much lower value than a PCR test.

And the first question you have, Chris, was around the dental, I think about the earn-out effectively.

Yes. So look, that's based around the pre-COVID EBITDA of the business of roughly $12 million, and it's on a pro rata basis of $0 to $75 million based on where that is now. And it's on -- it's got multiple testing points through that 18 months, including how the business is performing in the 3 months up to the completion of the transaction. And so right at this point in time, in the last 2 or 3 weeks, the business is back to -- it's actually significantly up on where it was the same time last year. There's obviously -- or at least likely to be some catch-up in that, I would have thought. So how it settles over the next kind of 3 months or so, we need to wait to see. But we would expect that business will get back to that. It's a very good business, the dental business, that sits inside our medical centers. It's a captured audience of patients that are coming into our medical centers. Its patient volume has come back the minute those centers basically opened. So we're pretty confident that we would get all or the vast majority of that $75 million.

The next question comes from John Deakin-Bell with Citigroup.

Look, just a couple of things. In terms of CapEx going forward, we've had forecast $175 million in FY '21, but that included quite a bit of acquisitions of GPs and also refurbing the GP centers. Can you give us a sense of maybe what proportion of CapEx in the going forward will be versus history? Is it kind of 60% or some...

Yes. Well, there's usually about $30 million that goes out every year in health care practitioner CapEx. And of course, there's been some pretty big use of infrastructure investment in Medical Centres. So you -- which we've actually separated out, obviously, each year. So that's what we see there. Look, we're not -- in terms of general maintenance CapEx in each of the businesses, we're not expecting that there's any catch-up CapEx for any -- for Imaging or Pathology. That sits at a pretty healthy run rate each year. What I'm expecting is that there will be, potentially, if we look at some inorganic growth, there might be an outlay there, but it depends on what opportunities are there at the time. And then, of course, we've got the [ Leap ] program, which we will give a full breaking on the full year in terms of both OpEx and CapEx and what we're planning to spend over the next couple of years.

Okay. And just one other question on the conditions of the bid. You note that further approvals required, and you didn't spell out any others. Is there anything else specifically we should be thinking about?

Look, there's normal conditions. We've got, obviously, to separate the business out. But that I guess you'd say that would be a pretty normal condition to have a separable business. And third, and then...

[indiscernible]

Yes. And the fourth is market and centers.

Your next question comes from Nicolette Quinn with Morningstar.

I just have one question. You referred to the $500 million enterprise value. Is it possible you could quantify the debt that's attributable to that business?

It's debt-free.

[Operator Instructions] Your next question is a follow-up question from Han van Boon from Robeco.

Sorry, a couple of questions. The price for the Medical Centre, you obviously sort of announced your intention to sell the business pre-COVID, and has the pre-COVID impacted the -- what you think is fair for the business? I know you said it's fair, it's a good price, but has COVID impacted the price -- the selling price of this? And second question, now that more or less you have secured the offloading of the Medical Centre business, the flip side you also indicated the potential acquisitions and actually quite imminent. Now is that fairly imminent now?

Well, let me answer the first question. It hasn't been -- the price has not been impacted by COVID. The Medical Centre business has traded very well through this period. And as Malcolm said, was able to very quickly switch to telemedicine, which is very, very successful. And the fundamentals haven't changed going forward. So it didn't offer the price of the business. In terms of CapEx and what's imminent, look, I think we'll give a full briefing at the full year in terms of each of the businesses and what we see as the potential opportunities.

Any final questions?

There are no further questions at this time. I'll now hand back to Janet for closing remarks.

Okay. Thank you very much, guys, for attending the call. And any further questions, please come through to me during the course of the day. Thank you very much. Bye.