Healius Limited (HLS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today for the Healius FY '20 results presentation. With me today are Dr. Malcolm Parmenter, our CEO; and Maxine Jacquet, our CFO; and several members of our finance team. Now as you will have seen, our full year results today include the impacts of AASB 16 on this year's figures, and they also account for Medical Centres as a discontinued operation in both the P&L and balance sheet. And these treatments certainly complicate the underlying results. So in recognition of everybody's busy schedules, what we're going to try to do today is as follows. Malcolm will give you his take on the results, the current trading and the go forward, and we'll field questions on those matters. We'll then allow people who wanted to drop off the call, and we'll do a second round of Q&A on the technical stuff, if that's okay. So I hope that will make sense, and we'll see how it goes. So with that, let me pass you over to Malcolm. Thank you.

Thanks, Janet. Good morning, everybody, and thank you for joining us today. As you all know, we've had a trading update post year-end. So I'm going to be brief with my messages today. We will highlight the key takeaways from the results. We'll update you on our current trading and strategy. And then we'll turn the call over to you for questions. So if you -- in terms of the slides, if we start with Slide 2, our group results slide. As we heralded in our trading update, our underlying EBIT for FY '20 was $102.7 million, an NPAT of $55.4 million. This includes the contributions from our Pathology, Imaging and Day Hospital businesses, which are our continuing operations. Now our reported figures seem and probably are even more complicated this year with the accounting treatment of the sale of Healius Primary Care and the introduction of AASB 16, making results already muddied by COVID more difficult to interpret. And so we've included reconciliations in the appendices, so you can follow the adjustments and their rationale. But in essence, there is a $142 million loss from discontinued operations, which is mainly made up of noncash impairment of goodwill that we were holding on the balance sheet for our Medical Centre business. There's also about $25 million in net profit recorded in our reported results that we have removed to get to our underlying results. The big adjustment this time is the ATO refund we are expecting for the 2003 to 2007 tax case, and we expect to see a conclusion of this case during the course of this calendar year. And finally, with our prior year numbers not adjusted for the impact of AASB 16, we have backed the AASB 16 impacts out of our underlying results in FY '20 to give you a like-for-like comparison. Now at the risk of delving into technical accounting this early on in the presentation, we have a $9 million decline in reported NPAT due to AASB 16 this year. That's the result of a large number of leases on our books, their relative length and age and because of the treatment we have necessarily adopted under the standard. Now on the important issue of dividends. We expect to pay out the delayed interim dividend of $0.026 per share fully franked on the 15th of October 2020 as we rescheduled in the height of the COVID-19 lockdown. Even though we delivered a relatively strong FY '20 result, the Board does not consider it appropriate to pay a final dividend for FY '20. Now this is because we receive the benefit of assistance and, in some cases, personal sacrifices from our stakeholders, from our people, our landlords and the federal and state governments through a challenging second half of FY '20. Nevertheless, with a strong outlook for FY '21, we expect regular dividends to recommence in the first half of 2021. Moreover, following the receipt of the sale proceeds for Healius Primary Care, the Board intends to review its capital structure, including consideration of an out-of-cycle dividend. Now we hope to provide an update on this capital management review at our AGM on the 22nd of October 2020. If you turn to Slide 3 -- Slides 3 and 4. Let's get into a little more detail on the underlying results for the year. We were trading up above prior year until mid-March with Pathology, Imaging and Montserrat all performing well. If you recall, Pathology EBIT was up 10% in the first half, Imaging up 16%, and Montserrat was starting to hit its stride, delivering $2 million EBIT in the first half. This positive trend continued until mid-March when the government imposed the national lockdown of the country in response to the spread of COVID-19. As a frontline health care provider, our overriding focus was to help combat the virus through setting up pathology drive-thru testing centers, reworking our labs to expand COVID testing capabilities and creating GP isolation rooms and telehealth services and, of course and most importantly, providing a safe environment for our people and for our patients. We experienced a decline in volumes in noncritical and routine services in line with community concerns around visiting health care centers and the cessation of all nonurgent elective surgery. At their worst, volumes were down over 30% in Pathology and 40% in Imaging compared to the prior comparable period. Now at the same time, new COVID-19 testing and telehealth services partially offset these declines. In addition, we took on the costs of personal protective equipment and COVID screening in our centers to offer a safe environment to our patients and to our staff. Naturally, without knowing the extent and timing of this downturn, we work with key stakeholders to implement extensive cost cuts across our business, such as reducing opening hours and temporarily closing a number of collection centers and imaging sites. During this period, we were very grateful for the amazing response from our people and undertook labor management initiatives such as getting people off on annual and long service leave and voluntary leave without pay. Our property team are also successful in seeking rental concessions and received in the order of $7 million in delays or waivers from various landlords. We'll also receive around $11 million from the federal government, which offsets a portion of our revenue decline from April when matters were at their worst. In return, we kept our remote and rural services operating, maintained our permanent staffing levels and took a pay cut at the Board and senior level. And we are also very appreciative of this help. We also received a very small amount of JobKeeper and viability payments in our Day Hospitals. Now without the collective support of our stakeholders, we would have necessarily undertaken further cost-cutting measures, including laying off staff and reducing services. As it was, we were able to keep all our permanent staff on our payroll, including in Dental and IVF when they were totally shut for a period of time. Subsequently, as the economy reopened from early May onwards, we were fortunate to experience a strong recovery in volumes, in particular, in Pathology, followed by our other businesses with the recommencement of elective surgery, IVF and dental activities. By the end of the year, we started to see the natural hedge that we have in our Pathology division with a significantly elevated level of COVID testing, offsetting declines in BAU testing. The other divisions, like Imaging, do not have this hedge. The next slide, Slide 4, shows you clearly the impact of the lockdown on our 2 big divisions for the 4 months between March and June. Now if you turn to Slide 5. If we look at our trading in July and August, the trends at the back end of FY '20 have been amplified with the reemergence of COVID in the Victorian community and more recently in New South Wales and Queensland. In Pathology, we are seeing very strong volumes with a further escalation in our community COVID testing. We've now completed more than 1 million COVID PCR tests, more than half of those since June 30. Indeed, July was a big month, and our Pathology revenue was up 25% on 2019. It has since come back a little in Victoria with the Stage 4 lockdown, but at the same time, testing has increased in New South Wales and Queensland. We've won a number of commercial contracts for COVID screening, including the federal government and opposition, their staff and families, the AFL and all passengers traveling to and through the U.A.E. We expect commercial contracts to continue to increase through FY '21 as organizations endeavor to operate in a safe environment as they reopen. They may serve to increase our overall numbers and/or counterbalance any future declines in community COVID testing. In Imaging, the story is a little more constrained with revenue down 4% in July. All states showed recovery to be ahead of last year, except for Victoria, which was down around 17%. This division is being further impacted in August by the Stage 4 lockdown and cessation of elective surgery in Victoria. However, there is pent-up to demand, especially in the elective surgery space, which will come through as restrictions are eased. And we have a tailwind in imaging and indexation of the MBS schedule, which started in July this year. The Day Hospital division has started this financial year significantly ahead of 2019 and contributing positively to the group's EBIT. Montserrat's revenue was up 27% on July last year, while Adora Fertility was up over 50%, with strong demand continuing and the government's exemptions for IVF services in Victoria proving valuable. Net-net, we've started the FY '21 year very strongly. However, as you can imagine, it's a very fluid situation with COVID-19. And the only thing that is certain is whatever we forecast, we probably won't end up there. In the meantime, we have the benefit of the learnings from March and April to help us proactively manage our cost base, which we are certainly doing. Now looking at Healius Primary Care. In July, revenue was up 7.5% on the prior comparative period with the support of telehealth. Costs have been well managed, including in Victoria as the volumes fluctuate in response to the pandemic. Importantly, Dental has now recorded 2 months of strong results, which are above the level required to receive the full earn-out on completion of the sale. The separation process is on track, and we should complete this calendar year. Now if we turn to Slide 6, our balance sheet at the end of FY '20. The main points I want to highlight are these. Our operating cash flow before AASB 16 impacts exceeded the cash flow in FY '19 despite COVID-related trading disruption. This was achieved through the stringent cash and profit conservation measures, which I've spoken about, including network rationalization, rental renegotiation and labor management, along with deferral of some payments, such as taxes. Combined with the strong trading outside of the COVID period, these cash conservation measures delivered an improved net debt position in FY '20. And we finished the year comfortably below our debt covenant of 3.5, which was our stated aim. In addition, our liquidity position improved to $424 million following the successful refinancing and increases of Tranche A of our borrowing facility in mid-June. Our capital spend was at $122 million this year, down from $160 million in FY '19 excluding the acquisition of Montserrat. It will further reduce with the sale of Healius Primary Care, which made up over $40 million of this year's capital investment. Slide 7. As you are aware, in June 2020, we announced the successful conclusion to the Medical Centres sale process with a sale agreement signed with BGH Capital for $500 million. Completion is expected, as I said, in the first half of this financial year. This sale is in line with our strategy to simplify the portfolio and enables the realization of value with our medical centers, which was not fully reflected in the share price. It will also significantly strengthen the group's balance sheet and support growth initiatives while improving free cash flow. With the sale completed, we'll be able to focus on pathology and imaging, where we are the second and third largest players, respectively, and where we have scalable business platforms. We will also look to invest in our day hospitals. The sector now has strong economic, technological and regulatory tailwinds as a lower cost and clinically equivalent alternative to traditional overnight hospital care. We aim to build a substantial third business in this sector as a diversified platform for future growth. Slide 8, our Sustainable Improvement Program or SIP. This was introduced late in FY '19 to systematically reduce costs and improve efficiencies across the group. Pathology and imaging labor, pathology property and Pathology consumables were identified as the largest addressable opportunities. As you will recall, this time last year, we announced a target of $70 million in savings, representing 4% to 5% of this cost base. If you go to Slide 9. In FY '20, over 150 initiatives were established in labor, property, consumables and IT. Across the group, in-year savings of $37 million were delivered despite the inevitable shifting of our focus to COVID-related challenges from mid-March onwards. These savings served to offset some of the inflation in our $1.6 billion cost base. Now Slide 10. The details of the savings can be seen on Slide 10. These figures are all quoted net of one-off implementation costs of around $13 million. The annualized run rate of $54 million in savings makes up a good portion of the program's total target of $70 million. If you go to Slide 11. We intend the SIP program will continue apace in FY '21, expanded to include revenue initiatives and all growth CapEx. And we're looking at more complex but higher value structural improvements. From here on, we are seeking not only to stem the growth in our cost base, but to deliver real margin improvement. We expect to achieve this in FY '21, especially with the sale of Medical Centres, which has recently had a fast-growing cost base due to our Leapfrog transformation program. So our focus in the next 3 years is as follows. Firstly, digitization and automation. And this has -- this will do 2 distinct things: firstly, it will improve the front-end experience for our patients, which we believe will drive revenue; and it will automate and standardize the back-end processes, which will deliver savings. As an example, about 80% of our receptionists at our imaging site -- the reception's time at our imaging sites is currently spent on making bookings. We'll be working on network optimization in our physical footprint. And here, we're talking about collection centers and warehouses and imaging facilities. Our workforce management, and this is really about 2 things: one, the balance of workloads at the front line as we seek to improve labor efficiency and output; and secondly, improvements in our rostering tools to more dynamically match our supply and demand. Another focus is the reduction in our external spend, currently sitting at $750 million as we instigate more direct sourcing and retendering of contracts. In addition, with the sale of Medical Centres, we are working on redesigning our corporate model to reflect our more streamlined operations. Over the next 2 years, we will implement further savings of approximately $15 million in support function cost base. Turning to our divisional results and strategy. Now I don't plan to step through all of the divisional results or cash flow and gearing slides in detail, but they're there for you to read. I will, however, highlight a few items. Now on Slide 14. In Pathology, part of the division's success this year was due to a 2.8% increase in average fee from a range of initiatives we undertook in the year, including private billing for ECGs, overseas patient billing and health fund gap billing. It's also due to the COVID testing fee from the government, which has enabled the rapid change in our laboratories to accommodate COVID testing equipment, including the equipment the Minderoo Foundation was able to procure for the benefit of the country, the rollout of drive-thru testing centers to enable easy and secure access for the public, the operation of extended hours to ensure our patients get their results as soon as possible. And we're grateful to the government for the introduction and maintenance of this fee. It recognizes just how indispensable pathology's contribution is to the country's fight against COVID. If you go to Slide 16, as we indicated at the half year results, we've shifted our strategy for the Pathology Laboratory Information System, or LIS, by unbundling our different LIS challenges and tackling them through a set of specific and tailored solutions. This has a number of benefits over moving from our current state directly into a new software solution. In particular, less implementation risk for the lab and frontline staff, more efficient process, several solutions can be developed in-house, and benefit profile is more advantageous as several business improvements can be made within the current system context. A detailed program is close to completion. It will be announced in the first half of FY '21 on completion of vendor discussions and project planning. If you go to Slide 19 and Montserrat. I also want to highlight in this presentation the success achieved by Montserrat in FY '20 despite COVID. Its 4 new facilities have seen a rapid increase in their volumes and returns, and this includes Westside Private Hospital in Brisbane, which is now used by approximately 40 specialists. Overall, Montserrat achieved an EBITDA of $5.4 million, which is broadly in line with expectations at the time of acquisition, but delayed by a year with distribution from the 4 new facilities, and further substantial growth is expected in FY '21. Slide 21. In regards to Day Hospitals and Adora Fertility, our near-term strategy is simple, turn them around to deliver profits in FY '21. And we started well. Adora traded well despite the COVID-interrupted year and has initiated selective price increases in its offerings. It's still a quality, low-cost offering but one from which Healius aims to derive a positive return going forward. The Healius Day Hospitals support IVF activities primarily. They are now under the management of the Montserrat team who are looking at turning around the business to profit from doing the basics better, such as labor, consumables management, business development and billings. As I mentioned in the trading update, the consolidated division had a strong start to FY '21 with a positive contribution and an effective $1.5 million EBIT turnaround from July FY '20. Our cash flow slide on Slide 24. We've already covered most of this information. But importantly, we will see more cash -- free cash flow in this business next year without the Medical Centres and its turnaround investment. Our capital-intensive projects are also reducing and with them the level of non-underlying items. It will be great for all of us and, I'm sure, all of you to have our underlying profits resembling our reported numbers and to have both more closely aligned to our cash flow. So with slide -- you can look at Slide 12. And with that, I'll leave you with a wrap-up of FY '20 and pass you back to Janet. Thank you very much for listening.

Thank you, Malcolm. We'll now, as I said, try and focus, first and foremost, on the sort of the big picture questions, if I can. So I'll open it up to the questions. Thank you.

[Operator Instructions] Your first question comes from Lyanne Harrison from Bank of America.

First one I have is on your Pathology business. Obviously, you've got a good start in July with Pathology revenues up 25%. Do you get a sense that you're taking more than your market share in Australia? And do you get a sense of what your market share might be? And can you give us a little bit more detail on the contracts you have with federal government and AFL?

Look, there's a lot of detail there. Look, I think what I'd say about the current operating environment is that it is very regional in terms of the way it plays out and depending on where COVID crops up and how the distribution of different businesses are impacted by that. You'll see we have a large Imaging business, for example, in Victoria. And so a Victorian lockdown has an impact on that. In terms of Pathology, we have a lot of public hospital contracts in Victoria, which with the more recent outbreak in Victoria has driven large volumes in that market. So I don't think it's possible to really talk about market share shifting. Over the long term, market share hasn't really changed very much in Pathology. And so I think it -- various businesses are impacted and benefited by where coronavirus crops up and a whole bunch of other factors around how much is in the public hospital space, how much is in the private space.

So coming back to that, in terms of what's in the private space. Do you think that Healius is getting more than its fair share of that private space or pretty much in line with what you would ordinarily get?

Look, it's hard to say, really. I think we had a slow start to it. And that's because I think the first round was in New South Wales, where we're probably not -- we're not as large a pathology player in that space. And we certainly haven't -- at that point in time, weren't in the aged care space. And so with the emphasis moving to Victoria, where we have a large public hospital space, that's driven pretty strong volumes for us. And now with -- in New South Wales, with it -- more in the community and in Queensland as well, we're actually seeing strong testing volumes in New South Wales and Queensland that we really didn't see in April. So it's -- it swings and roundabouts, Lyanne. I think it's not easy to predict where it will go either from now on.

Okay. And then if I could have another question on Imaging in terms of what you're saying about exposure to different states. By my calculation, your Victorian imaging locations work about to be about 20%, 25% of your total locations. And I would have thought that with some of the bounce back in diagnostic procedures that have come through in July and August that this would have helped offset, I guess, the worsening situation with coronavirus in Victoria. However, the Imaging volumes are still down in July and worse in August. I guess, to summarize my question, are you not seeing bounce back of volumes in states like New South Wales, Queensland and the like?

Yes. Those states are ahead of last year. So they have largely recovered. And as I said in the presentation just now, we -- there -- we expect there will be -- that there is -- and we see evidence of it, that there is pent-up demand in terms of particularly elective surgery. And a significant part of imaging is about preoperative and postoperative scanning on imaging volumes. So Victoria is our largest and most profitable business. And so it -- downturns like that don't make it unprofitable. But they certainly have an impact on our Imaging business when it's the Victorian business that's impacted.

Your next question comes from Steve Wheen from E&P.

I also have a question on the Imaging business. I guess looking at the revenue impact of 3.7%, it's hard to reconcile the magnitude of the EBITDA decline. I'm just trying to understand what's going on in the cost base there. I get it that there is a level of fixed cost leverage, but I don't think we've seen that sort of leverage before. So can you help us understand the cost base in the Imaging segment specifically?

Yes. Look, it's -- the reality is that the speed of decline that we experienced in our Imaging business with volumes getting down to -- I think on 1 or 2 days there in April, getting down to sort of 50% down year-on-year. That's sort of rapid decline. While we had quite, I think from our management team, a very rapid response in terms of reducing labor, there's a whole lot of other costs related to Imaging business -- the Imaging business, including leases and other sorts of property costs, equipment leases, a whole range of things that are a fixed cost within that business. And it's how quickly you can actually respond to that with a rapid decline and then a progressive recovery. The other thing is that as part of this process, we endeavored to keep our staff with some kind of income through that period. So we made a conscious effort around trying to support our people through that process, seeing that the business was actually starting to recover again reasonably quickly. And it's the depth of that and the speed of that decline and then the recovery over a 2-month period that was more difficult to offset.

Okay. And could you confirm whether or not there's been any reallocation of costs to that segment? I mean there's a lot going on in your numbers that it's very difficult to reconcile to FY '19 at all. But can you just confirm whether or not we've seen, with the divestiture of Medical Centres, any reallocations into that segment?

Steve, there is, but it's small. It's not material to the result.

So it's not generating the 40% decline.

No, no, no.

Okay. Secondly, just -- you've done quite an extensive head count reduction, and there's reductions to senior management salaries and Board, and yet corporate costs going up. Can you also sort of talk to the cost base there as to what's happening?

Yes. Steve, can I do that, if you wouldn't mind? So I think you're referring to the 2 and a bit million in corporate costs that have gone up. At the EBITDA level, they've actually come down marginally from $15.8 million to $15.3 million. The most material item you're seeing increasing is actually in depreciation charge, which is some IT assets, which have moved out of construction and now being depreciated. So that's what's happened in the corporate cost. We did, in the year, also have some very material increases in insurance costs, and you've seen what's been taken out of the SIP in cost base in terms of labor, which is largely in corporate. So I mean it's more a neutral position, I think, than a cost increase. And if you'd like, I can talk about the overall cost base as well, if that's helpful.

It would be. I mean I guess, yes, that would be helpful.

Okay. So look, I might do it by nature for everybody, which is -- because I think it is as we look at what the SIP savings are, if I direct you back to the slide in the pack, which talks to the SIP program and the cost bridge. And so if I take out the Healius Primary Care and the Montserrat run rate full year cost base, you're seeing a net increase in the cost base of 1.9%. And if I could just talk about what the major items are in terms of that cost base. So labor moved up 3.8% in the year, which you'll -- on a reported level, so you'll see it moving from 786 to 816. 1% of that 3.8% is related to the non-underlying items, including redundancies and the projects which have since ceased. The remaining 2.6%, 7 of that million, which is $7 million of the $20 million, is Montserrat full year run rate. And the rest is EBA increases. So most of our EBAs do run at 2.5% to 3%. And just to give you some context, it's about 85% to 90% of our staff in Pathology and Imaging that are under EBAs. So in terms of labor, that gives you a sense of the cost inflation. And also you've seen there what labor costs have come out. In terms of consumables, that grew by 3.9% from 195 to 203 or $7 million. $3.5 million of that is Montserrat full year. And we also had a very large increase in consumables particularly in Pathology, reagents, collection, consumables and PPE across the group, which was $10 million. And our -- Pathology were partly able to offset that being $5 million. And Imaging did offset some of their consumables being the cost per reportable coming down $2 million from that. And then property, again, that was up $5 million, with $4.6 million of that accountable for Montserrat. So those property savings were also coming through, particularly through that COVID period.

That was really helpful. Just one final -- it might be kind of related, but just now turning to Pathology. You talk of a margin expansion. But if you back out the government's support, there's not a margin expansion. I guess you've kind of left us hanging with a comment that says that there's other measures that could have been taken. Can you talk to those and what -- is that something that we can look forward to? And what...

Yes. Look, I think there certainly is -- if I -- there are temporal measures, which are more some of the rent savings and annual leave savings. But there definitely are some structural improvements as we look to reduce or rightsize our collection center network. So there are some longer-term benefits out of there. But as Malcolm said, we were under an obligation to essentially keep our staff employed through the period. So it was really managed more through leave management than through standing people down.

Your next question comes from Chris Cooper from Goldman Sachs.

Can I clarify on the Sustainable Improvement Program? So when this was announced last year, you targeted $70 million of annual savings. You're now tracking at $54 million. The savings target was by, I believe, you said end of fiscal '23. So are you sticking to the $70 million? I mean my understanding is there's an additional $15 million coming from operational streamlining as a result of the sale of Medical Centres. But otherwise, if you're sticking to the $70 million, the implication is that this extra $16 million to go over the next 3 years. Is that correct?

Look, the extra $16 million will be on top of the $70 million because you're looking at the annualized run rate of where we are. Look, we're not giving another specific target beyond the $70 million at this point in time. What we would like to do going forward is do what we've done in the last 2 periods, is show what the cost base is and how we're addressing the underlying cost base. And as we look at more of the structural initiatives actually essentially give more detail once we've got those to a point of delivery. I can say that we have -- the first round, as I think I said before, was very much focused on, although it was a large effort, it was 150 initiatives. I would call that more low-hanging fruit. We certainly focused on functional labor being support labor. And the next-generation of this program is looking at more of the structural pieces around operating labor and how do we improve the, as Malcolm's talked about, each of those areas. And so we've scoped the program. We've sized it. There will be -- and we have a delivery schedule which we expect will come through in the next couple of years in terms of cost-out. But I'm confident that we will get certainly more than that original $70 million. In terms of our internal targets, it's much more substantial than that. But let's wait until we get deliveries rather than putting a number out there now.

Okay. So the initiatives outlined on Slide 11, on the left-hand side of Slide 11, so the sum total of that, you believe, is well in excess of getting you above that $70 million?

Yes, absolutely.

Could we expect perhaps a formal announcement of what that target might be at some point through the year?

Look, we can certainly give more detail. I think for the $15 million that we've identified, look, some of that is -- some of it is labor, but we do have some large contracts as well both in the property and telco space which are coming up, which we have engagement around how we're planning to reduce those. So look, I think it won't be a whole of program announcement in the next few months. I think as we get more specific around delivery time frame and actually get closer to actual realization, I'd rather wait until that point.

Okay. Just changing gears. So just on the comment around the 25% growth in Pathology in July. Can you just confirm my math there? So Malcolm, you commented that I believe you said over half of the 1 million PCR tests you performed has been since 30th of June. So just straight-lining that, my math would suggest your base business is flat in July. Is that correct?

Sorry. I didn't catch that last bit, Chris.

So let's assume 500,000 tests since 30th of June, PCR tests for COVID. I believe that would imply that your base business for the month of July was flat in Pathology. Is that broadly correct?

Yes. Look, in the last week or so, it's -- BAU has been progressively recovering over that period of time in all states other than Victoria, where lockdowns have a way of slowing down BAU work. And look, there's a natural hedge there between when COVID comes along, COVID testing goes up and BAU goes backwards. And once it gets more under control, BAU comes back and COVID testing tends to go down. So it's that -- that kind of swing factor seems to be the way it's working at the moment. Whether that will continue, I don't know, but that's the way it looks. At the moment, in our other states, we're seeing BAU testing progressively improving. And you'd expect there would be some backlog around that too as it recovers.

Okay. Okay. But I guess it was more sort of historically speaking for the month of July. But I can take it off off-line, that's okay. And just very lastly, just a quick housekeeping point, on Slide 14, just on Pathology. So volumes are down 1.5%. Pricing on average was up 2.9%. But your group -- your revenue for the segment was up 2.8%. I don't get the math. Is the delta the M&A? Or is there something else I'm missing there?

There was an acquisition in the year. Yes, Coastal Pathology?

Yes. Yes.

Small.

Yes.

And the government grant income.

Government grant income, okay.

Yes. There's about $11 million in government grant.

Your next question comes from David Low from JPMorgan.

Could we just talk on -- can I get you to be a little specific on Victoria? I mean I know on Slide 28, you can see the breakdown. But maybe, Maxine or Malcolm, if you could talk a little bit to roughly what proportion of this Pathology and Imaging businesses, in particular, the revenues are coming out of Victoria?

Yes. Okay. Sorry, we're just going back to the slides. Sorry.

But I mean I'd love revenue share, roughly, perhaps it might be the easier way to do it or if you could provide whatever is most convenient.

Yes. Look, I think probably we can't really provide revenue share by state, David. It's -- we won't be providing that information.

No. And it depends on your mix, too, if you test right, so whether it's in a hospital environment or whether it's in a community environment.

Yes, hence, my question. So 35 of the 146...

I understand where you're going.

Yes, I know. But just -- I mean you keep talking to it without sort of -- I don't get it -- I mean, Victoria, I think you're 1/3 of the market in the past, historically, you got public hospitals as well. Would that be a rough indication?

Yes.

Yes, roughly.

All right. Moving on. Montserrat Day Hospitals have done very well, and that's encouraging. But we would have thought there's quite a lot of pent-up demand in that space. Can you maybe talk a little bit about how much you think this might be catch-up and quite a more natural level of growth could be?

Yes. Look, I don't -- I think there's catch-up coming, but I don't think that's really what we're seeing just yet. And I think it will continue to grow. I mean Montserrat's facilities are largely Queensland and Western Australia. So it's kind of starting to get back to kind of BAU functioning, and it's been growing progressively over that time. And we expect that, that trend will continue as we go through the year.

And the specialist were in the pipeline to come in, came in as planned. And I don't think -- it's certainly not a surprise to us, that result.

Okay. Could I ask a related question then? I mean in terms of capacity utilization, is there any constraints? Or could we see the revenues from Montserrat going up by multiple?

Yes. I think we -- that's indeed what we expect, in fact, with that business. That is what would happen. So particularly at Westside, so it's got some way to go yet before it reaches capacity. And its revenue is growing strongly, its profitability is growing strongly.

Okay. And just the uplift in IVF as well, I mean, 50% pretty impressive. Is that people coming through who perhaps were kept at bay through the months of the shutdown?

The actual volumes are only up marginally year-on-year in terms of cycles. The main difference to revenue is some changes that we've made to the pricing structure in terms of some additional fees that we charge in that business. And so that's driven what we believe is a sustainable improvement in margin for that business.

Okay. And the last one is the funding for COVID testing in Australia is due to expire, as I understand, at the end of the quarter. What are your expectations? And where are the negotiations up to on that front?

Look, as an industry, we believe there's good justification for continuing. The fee at its current level, at least for some time yet beyond that, and that's certainly the case that we would put to the federal government. I think it's enabled the introduction by all providers, whether public or private, to provide a much better service, extended hours of collection, a whole range of services in terms of turnaround times and various others that wouldn't have been possible without that. So look, we think that there are benefits to the fight against COVID for that fee to continue with where it is. As to exactly what will happen. Look, your guess is as good as mine, really, David.

Your next question comes from Andrew Goodsall from MST Marquee.

Just starting off on the Pathology business. You have mentioned just before on the potential restructure or changes to collections. And I was just trying to understand what savings you see as recurring in the rents that you've -- the rent reductions you've got at the moment and then sort of where you think you can go further with savings on the collection side.

Look, we have been looking at our collection center network. As you know, we have the largest fleet of collection centers around the country by some margin. And you will have seen in the most recent numbers that we have been reducing our collection center footprint. And that's been around looking at the margins for collection centers at the edge. And so we've been working at this for a couple of years now and sort of working on implementing systems around what makes sense and what doesn't from that perspective. And so we have some real momentum in terms of making some changes in that space to reduce the numbers of collection centers that we have.

And just sticking with Pathology quickly. You mentioned the average fee is up 2.9%. Again, just trying to understand, is that continuing? Or does that include COVID-19?

That includes a little bit of COVID-19. As you've guessed from the kind of number of tests that we've done and the number of tests we've done since June 30, it had less of an impact in FY '20 than probably in the last 8 weeks or so. But a significant part of that's been around private fees in -- with ECGs that we provide, our billing in private hospitals, a range of private billing initiatives has driven it. And then there's been some changing -- changes related to coning that have driven part of that increase.

Okay. And then just the final one, just on the day surgery hospitals, just in terms of trying to understand the outlook here. I know you've talked about the magnitude of growth you're expecting. But are you sort of seeing that already in either your estimates of the backlog or just even in forward bookings? Just trying to get a sense of the level of confidence you've got there with that.

Yes, we are. Look, I think certainly, in the Day Hospital business, it's a bit of a balance between patients being a little frightened about coming into health facilities still on an ongoing basis. So you've got that moderating factor in terms of where it is that has -- I think confidence is slowly returning, but it's not back to the point where people who have truly elective things that they often restrict that themselves. So I don't think we're actually really seeing all of the uplift that we'll see from pent-up demand. But I think the backlog of elective surgery, you would expect will be significant after the length of time that it's been shut down for. And the kind of spare capacity in the system more broadly would suggest that it will take quite some time for the system to catch up. So you would expect that that's a trend that will continue for some time going forward.

Your next question comes from Gretel Janu from Crédit Suisse.

I just wanted to go back to Andrew's questions about collection center rationalization. So do you have a target number of centers that you wish to close? And kind of what time period are you looking to kind of execute on this rationalization?

Yes, we do have a target number, not that we're about to say what it is.

No. But it's over the next 3 years, too. So we have -- we've already closed some, which we're going to keep closed. And we have a target number for the next 2 years.

Can you give any indication? Are we talking 10, 20 centers, hundreds of centers?

Well, yes, it's more than 20.

Okay.

What was the second part of your question, Gretel? I missed that bit.

Oh no, that was all. Then moving on just in terms of COVID testing. And I just wondered your opinions on the opportunity for serology testing particularly now in Victoria because we have seen a large increase in infections. Do you anticipate that as an opportunity going forward?

Look, I'm not the expert at this. But look, what I'm told is that there's quite a lack of certainty around the value of serology testing. And so as to whether that -- the actual result actually tells you whether you're immune or not. And the length of time that antibodies last doesn't necessarily tell you whether or not that patient is immune. So look, I think the jury might still be out in terms of whether serology testing actually has value going forward. So -- and how much of that there will be. So look, to be -- I know that's not much of an answer, but I don't know that anybody can really give you a clear answer on how much -- on whether that's going to be a value or not in the future.

Your next question comes from Sean Laaman from Morgan Stanley.

My apologies at the outset, Malcolm, I am going to ask about medical centers, but as it pertains to the Pathology business. So in light of that, would it be fair to say you're seeing similar trends with respect to telehealth visits as what's reflected in the Medicare data? And then the knock-on from that, from telehealth visits, is there any kind of no-show when pathology is requested? If there's any data you can share around that would be the first question.

Yes. Thanks, Sean. Look, it's a really interesting space because it's kind of like an experiment in real-time in terms of how this all works out. Telehealth varies enormously depending on what's happening in the community. So right at this point in time, in our medical centers in Melbourne, about 73% of doctor consultations are telehealth. In the other states, they've slowly drifted back to face-to-face. So that telehealth has not stayed at the 30-something percent that it was, but the numbers have been progressively coming down. And it's hard to know exactly where that actually ends up in terms of where it goes. I mean international experience suggests that as much as 50% of GP consultations could be done by telehealth. But maybe that's something that takes a population quite a long time to transition to -- for people to actually get used to that. Right at this point in time, it seems like there are a lot of people who have a preference for face-to-face. And so they gradually drift back once they have the opportunity to do so. Now what happens to tenants within medical centers like pathology collection centers when 20% of the patients are not physically coming to the location? And do they follow-up on their GP referrals in that scenario? Look, the chances are that they do. Whether they come to that particular collection center remains to be seen. And I don't -- it's early days, and I don't know whether that makes a difference in terms of whether people actually get it done and whether they come to our collection center or whether they go somewhere else other than where their GPs refer them. I think it does remain to be seen. It's an interesting question and one that occupies my mind as well in terms of where this goes.

Sure. I've got 2 more, if I may. So for a long time, you understand -- understood within the IVF business, it's been sort of that bulk billed model. So is it fair to say that you've moved entirely away from that bulk billed model, and you now see that, over time, that you'll begin to make a profit or be it as that kind of really strong growth that you've seen at the price of that, that you've really seen over the last few years since IVF began within Healius?

Yes. So look, we haven't moved entirely away from the bulk bill model at all, really. We've introduced some fees for a number of services that we provide as add-ons within that business that's creating some margin around there, some additional services that we've added into the business. There's a range of things that we do. The basic service is still a bulk billed service in terms of where it goes. So we haven't really changed that model. I think -- yes, look, we're not a charity, I guess. And so we'd looked at building that model. And we've certainly got significant market share in terms of -- particularly in terms of fresh cycles and a business with outcomes for fertility services that are the equal of antibodies so at a much lower cost. But that doesn't mean that we want to keep doing that at a breakeven or a loss. So look, we've looked at that, and the team have been working towards this, and they have restructured that. And look, we're pretty confident that, that business becomes profitable from now on.

And with the introduction of the fees...

If I may on Day Hospitals and just more macro, I guess. So for quite a period of time, we've understood if you benchmark a procedure done in a day hospital against a big overnight hospital that general rate paid by an insurer is something like a 30% discount. I'm wondering if that's fair across your business, if that kind of rule of thumb holds true and if you think going forward whether you see that arbitrage closing. I mean you moving up as opposed to hospitals -- overnights going down. Or is it the other way around? Do you kind of hold sort of price? And do you think that this natural organic volume growth in the business is a more attractive treatment option in an outpatient setting?

Yes. Look, that's a complex issue. Look, day hospitals operate on a much lower cost base, for starters. And so they can afford to do those procedures at a lower cost and still have good margin in that space. Now there are -- if you look internationally, and this has been our view, that there are a significant number of procedures that in carefully selected patients can be done at least as well in the day hospital space and managed in a home environment in terms of rehab. And so they're procedures like orthopedic procedures, hernias and some gynecological surgery in terms of day procedures or short-stay procedures. And so internationally, when that's happened, it's been a transition that's happened over time in terms of those things gradually moving into a short-stay or a day space. And I think what happens here is that the long-stay hospitals will still -- I think elective surgery increases over time. If you look what happened in the U.S., the long-stay hospitals have kind of stayed relatively flat or plateaued. And the day hospital space or the ambulatory surgical space has increased quite significantly over that period of time. And look, I don't see any reason why the Australian environment wouldn't follow the same pattern. It's lower cost for things like hip replacements, knee replacements. And it -- and outcomes in terms of postoperative infections and readmissions are better than -- in carefully selected patients than they are in a long-stay hospital. Now having said that, if you're 85 and you've got heart failure and renal failure, you're not going home the same day. So it -- but if you're 50, and you need a knee replacement, then -- and you've got nothing else wrong with you, then with appropriate care provided in the home situation, you're actually better off there.

Your next question comes from Saul Hadassin from UBS.

Malcolm, just a quick question. You've given some nice color on revenue growth rates across the businesses for July. Can you give us any color of what earnings have done in the month?

We've -- we're not providing that information at this point, Saul.

Is it fair to assume though that considering the fixed -- high fixed cost basis of most of those businesses that, that revenue growth should, in theory, translate to a commensurate level of earnings growth? Or is there a suggestion that cost potentially step down?

Yes. No. Look, it's reasonable to assume that. I think COVID testing has significant costs attached to it in terms of where it is, but it has margin as well. So yes, look, I think you can assume that.

Okay. And just one other for me. And I guess that relates to the commentary around capital management and/or the idea of a -- of potentially an out-of-cycle dividend payment or a special dividend. How do you weigh up, I guess, the opportunities that may present themselves from an M&A perspective, particularly in the day surgery business and building that out or just investment in general versus capital management and return of capital potentially to shareholders?

Yes. Look, that's something that we'll be looking at in the next little while and will be taken into account in that process in terms of where we are, some opportunities that are possible at this point in time as to how they progress over that period of time. So we -- the Board has a view that it will have a clearer view come AGM time in terms of where it goes, and the decision will be made then.

And so just to follow up on one thing you mentioned regarding the earnings growth. Is it fair to assume that the incremental margin on a PCR test would be very similar to what you might lose on incremental routine work loss?

We're not talking about margins of different tests. And it really -- it depends on the environment that the test is done in as well, right, whether it's in a collection center environment or in a drive-thru, whether you've actually got the collection labor going along with it. It's quite a complicated equation to work through depending on where it is, where the test is done.

Yes. To put some color around that. The -- with COVID testing, if it's in relatively low volumes, then the -- and it's done in a collection center, effectively, the collector needs to put on full PPE, patient comes in, has sample taken. And then when the patient leaves, the whole room has to be cleaned down and left for 30 minutes before the next patient can come in. So that adds to significant cost. Whereas when you're in a much higher-volume environment like we are right at the moment, where you've got drive-thru testing, then obviously that's a lot more efficient. But I don't think -- it's not our view that COVID testing continues at this kind of level indefinitely. We're not sure how long it will go on for, but it's not something that we would think goes on indefinitely. And it probably goes back to a more inefficient way of collecting at some point as volumes drop away.

Yes. I mean you're talking about 1.5 tests an hour in a collection center environment versus your average of 6 tests an hour on your normal testing. So it's quite a different -- it's a significant reduction in throughput if you're in a collection center environment.

Your next question comes from David Bailey from Macquarie.

Just from me, in terms of acquisitions. Can you just expand a little bit as to where you think the opportunities might lie? Is it purely focused on day hospitals at this point? Or would you consider other areas such as diagnostic imaging as well?

Look, I think certainly in day hospitals, we're looking at that as we indicated through the report. We certainly believe there are opportunities in imaging in terms of where they are. In terms of other things that we're looking at, it's probably not appropriate that we comment on that right at this point.

Fair enough. And then just finally for me on Pathology. If you look historically, the margin trend has sort of been down. I mean do you think we get to -- over the next sort of 3 years or so, in conjunction with the Sustainable Improvement Program, do you think it's fair to assume that we should start to see some margin expansion come through over the next sort of 2 to 3 years?

We're very confident we can achieve that. That's absolutely our goal around where this goes. We believe the cost takeouts that are possible in this business will absolutely drive that.

Would you be willing to give us any sense as to any magnitude of what you might be targeting over the next couple of years?

Not at this stage. But as we go along, we will. And we'd like to demonstrate it rather than...

Say it.

Make promises.

Your next question comes from David Stanton from Jefferies.

Look, just simplistically because I'm a simple man, if we look at the combined IVF, DSH and Montserrat for F '21, should we be thinking positive EBIT contribution from that?

Yes.

Absolutely.

Yes.

Okay. And then second, guidance for NRIs for F '21, considering the business is being cleaned up somewhat. Can you help us with NRIs for F '21? I presume that will be on pathology...

Non-underlying. So look, the only project that will have non-underlying costs will be the LIS program. And so you'll see the iCAR program has now ceased. We closed down some of the corporate programs. Leapfrog has gone. So I mean, as a concept, we are trying to ring-fence it just to the LIS program going forward.

Should we be thinking around $20 million for that post tax?

Look, we're not going to give -- when we come back around the LIS program, and we'd like to do that, well -- we will certainly be doing it this half, we will talk about the mix of OpEx and CapEx for that program.

And then finally for me. You received government assistance in F '20. Any help on or guidance on potential government assistance for F '21? Should we be thinking it's probably going to be continuing in line with F '20 in terms of the scale?

Look, the assistance in FY '20 was almost exclusively in April. And so look, at this point, we're not expecting any government assistance apart from a very small amount with viability agreements for the former Healius Day Hospitals, it's pretty much where it sits at the moment. So very small numbers.

Your next question comes from Abhishek Jain from Citi Research.

Sorry, I guess that's me. John Deakin-Bell here. Sorry, I dialed in under another number. My question was just on the cash flow. Maxine, your gross cash flow is $405 million versus $195 million last year and $250 million on the year before. Can you just give us a feel for what was not paid and how much that should reverse in FY '21 so we can get a better sense of what the true debt position is?

Yes. So look, we -- in addition to our usual freeze that we do, there was some additional -- we started the freeze a bit earlier in May. So that -- in terms of AP freeze, so that there is an amount in there for that. There is also the tax deferrals as well. So net debt has ticked up a bit since the $666 million at the close, but not materially up. So -- and particularly, our receipts are reasonably strong at this point as well. So there's not a material movement in net debt.

Okay. That's good. And just finally on this, I know we talked a lot about the collection centers. But you've got 10% more collection centers than the bigger player in the market, and you have 25% less revenue. Just conceptually, is there any reason over a 3-year period why you would have more collection centers than the larger player?

Look, it's probably not as simple as that. But yes, look, as a general principle, I think us having more collection centers than the largest player in the business doesn't make a lot of sense. So we're out to make changes where that makes sense. But -- where it makes sense to do so. But look, that's got to be on the basis of the margin in each of those collection centers and whether that contributes positively or not.

Yes. And you can't just look at the total revenue because we're obviously stronger relatively speaking in the bulk segment, in the community collection. So it's not a like-for-like when you're obviously taking the total revenue. But understand your theme.

There are no further questions at this time. I'll now hand back to Ms. Payne to close the first Q&A session.

Thanks, guys. Look, that's gone on for a long time, but great questions. So if anybody wants to drop off the call now, please do so. We've got another 10 minutes, I think, on the call, if you -- if there is anybody interested in asking anything on the technical side around the accounting treatment for Med Centres or AASB 16. And if we run out of time, Max and I, of course, are doing one-on-one calls with you all this afternoon, the brokers this afternoon, so happy to carry on there. But let's open it up now if anybody wants to ask anything on the technical side.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Ms. Payne for closing remarks.

Okay. Thank you, guys. Much appreciate it for your time, and we look forward to catching up with everybody on the road show. Thank you very much. Bye.