Healius Limited (HLS) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today for the Healius First Half 2021 Results Presentation. With me today are Healius' Managing Director and CEO, Dr. Malcolm Parmenter; and CFO and Chief Operating Officer, Maxine Jacquet; and we have several members of our finance team. As you all have seen, our half year results include the impact of AASB 16 and the Healius Primary Care business has been accounted for as discontinued operations following the completion of the sale of the business in November. Following the presentation by Malcolm and Maxine, we will then turn to questions. So with that, let me pass you over to Malcolm. Thank you.

Good morning, everybody, and thank you for joining us today for the results presentation. It will be no surprise to any of you to hear that we're living through an extraordinary time in history. Without a doubt, it is one that will still be talked about many years from now, as indeed the Spanish influenza pandemic of the early 1900s is today. Operating a business through the seismic changes that we have seen over the last 12 months have certainly presented its challenges. Massive swings in demand for health care services from almost 50% down to more than 20% up. Over just a few weeks and months is only part of the challenge, maintaining a workforce, capable of delivering the services in the face of the pandemic and flexing to meet the fluctuating demand is also difficult, making sure our people remain safe through safe working environments, adequate PPE and the ability to self-isolate when needed are now part of the everyday experience at Healius. There have been times through the pandemic when hundreds of our people at a time have been required to self-isolate. This leaves the remainder of their teams with a job of covering what has at times been an unrelenting demand for services. And so I want to acknowledge today what has been achieved by our people across all of our businesses over the last 12 months. When the virus gained momentum last year, they faced it on the front lines and continued to deliver vital health care services. They're rapidly adapted to what was required to avoid infection in the workplace. And to this point, despite their higher risk, we've only had 12 out of more than 10,000 of our people become infected, which is a rate that is in line with what is seen in the Australian population more generally. When demand for services and revenue fell in March and April 2020 to the point where it was an existential threat to the viability of this company, they voluntarily took pay cuts and reduced their hours and leave balances to see us through. Everyone contributed, including the Board and throughout the organization. The unions representing parts of our frontline workforce also engaged in what was needed, and together, we found a way forward. It was an amazing thing to see and to experience. Well, since then, the landscape has changed dramatically with demand for services surging, especially demand for COVID tests. Every COVID test involves a one-on-one interaction between a collector and a patient, and flexing the supply of workers to meet the demand for at times, well over 20,000 tests in a single day requires a lot of people power just to collect the samples. But that's not the end of it. There are the logistics of identifying and establishing pop-up drive-through clinics in different locations as outbreaks occur, not to mention the long operating hours in laboratories aiming to consistently deliver results in well under 24 hours. Not surprisingly to me, our people have responded magnificently to these challenges as well. They've been incredible. I experienced it first time when I spent a couple of days during the northern beaches cluster, swabbing throats and noses on the frontline. Maxine Jacquet and Janet Payne were there as well. Now you might think they're collecting samples in drive-through clinics is a fairly easy job. Well, I can tell you it has its challenges. Not everyone arrives in a 4-wheel drive with their nose and mouth at head height providing good access. Some come in sporty little cars like Mazda MX-5s where they're so low, one almost has to stand on one's head to see where their nostrils are. What's more, the weather isn't always fine and sunny. Sometimes it's raining, sometimes it's very hot, which makes the wearing of PPE that much more uncomfortable. And sometimes long queues to have a test challenge the coping skills of patients. What I saw there was a group of people that cheerfully went about their work to shorten the wait times and make the experience of having a COVID test as pleasant as possible. And while the challenges vary, the response of our people across imaging, day hospitals and IVF has been equally inspiring. They've all ensured that their patients receive the essential health care that they require in a caring and a safe manner. And so as a thank you to our people in December, Healius gave all of our permanent part-time and full-time workers a one-off additional 3 days of annual leave as a token of our thanks to what they have achieved over the last 12 months. And if you will accommodate me for a few more seconds about this just before I go to the first half results, I'd also like to thank the federal government for its support of health care services over the last 12 months, especially Pathology. Healius worked closely with Minister Hunt and the Federal Department of Health in the early days of the pandemic to scale up COVID testing capacity. Andrew and Nicola Forrest and the Minderoo Foundation were also integral to that effort. Additionally, in return for a number of undertakings, including continuing to provide critical pathology services in remote and regional areas, the federal government placed the floor under pathology funding for Healius that guaranteed a minimum of 85% of FY '19 funding levels. Now while that only came into play in April and May of 2020, it was incredibly important to us at a time of such uncertainty, and we're grateful for that support. The federal government also provided JobKeeper payments to Montserrat Day Hospitals. The other divisions didn't qualify for day -- for JobKeeper. But this amounted to 1 point -- well, $1.3 million of which relates to the first half of FY '21, and this amount will be returned to the federal government. So now I'd like to take you through the group performance for the first half, highlighting the key takeaways from the results, followed by an update on current trading. I'll then ask Maxine, our CFO and COO, to take you through an update on the SIP initiatives, cash flow and capital management before going to questions. If you turn to Slide 2. The first half has clearly been underpinned not only by COVID testing, although that was a significant part of it, but also by savings from our ongoing sustainable improvement program. The balance sheet is in unprecedented territory for Healius with very low gearing levels, supported by strong free cash flow. The portfolio has been simplified by the sale of Healius Primary Care, which has further strengthened our balance sheet. All of this leaves us well placed to fund targeted growth investments and provide sustainable dividends. As you know, Healius briefly commenced the $200 million on market share buyback in December before entering the blackout period ahead of results. That buyback will restart shortly. Now moving to our results, if you turn to Slide 3. From a group perspective, revenue was up 16.7% with underlying NPAT at $75.6 million, up 190% compared to the same period last year. This includes the contributions from our continuing operations, which include Pathology, Imaging, day hospitals and our IVF business and include the impact of AASB 16, which accounts for a reduction in NPAT of $5.2 million for the half given the large number of leases in our businesses. Pleasingly, the group's focus on costs resulted in flat labor costs for the period compared to prior year. As promised, there is a material reduction in non-underlying items with the spend on the upgrade of our laboratory information systems in pathology and a small number of one-offs being the only adjustments. You should also note there was a $70 million credit in relation to the ATO tax case in the first half of FY '20, which negatively distorts the comparison for the reported profit period. On the matter of dividends, with the recent sale of Healius Primary Care and taking into account our results as well as the capital requirements of the company, the Board has declared a dividend of $0.065 per share, fully franked, is payable. Turning to our divisional results. And Slide 5, the Pathology results. Our Pathology division had a very good first half with over 1.6 million COVID tests performed during the period. Revenue was up 22% and EBIT up 141% compared to the same period last year. COVID testing revenue is the main contributor. However, national non-COVID revenue growth returned with the end of the Victorian lockdown in early October with a run rate since then of around 5% up on PCP. As previously foreshadowed as part of our SIP initiative, we have been rationalizing our ACC network, closing unprofitable and low-margin sites and consolidating others. The initiative has resulted in a 6% net reduction in ACC site numbers. And overall, non-COVID revenue growth has been maintained and $1.3 million of EBIT added in the half with more to follow. Over the last 2 years, Healius has been building a new laboratory for our Western Diagnostics Pathology business in Perth. The building is now complete, and the lab is being commissioned and will open in April. After a pause due to COVID, Medicare has launched litigation regarding the rate of floor space rentals at 2 Healius ACCs, as expected by the industry. Both leases date back to 2015. The maximum potential civil penalties that apply as such breaches are not considered material to the group. And given it is a matter that will now be before the courts, I don't propose to say anything more about it at this time. You can find further details on the Federal Department of Health website. Turning to Slide 6, our Imaging results. Our Imaging business had a mixed first half, and that result being a mix of what happened in Victoria as opposed to what happened everywhere else. Victoria is Healius' -- Healius Imaging division's largest state. More than half of our business in Victoria is located in public and private hospitals. The lockdown in Victoria from July to October last year saw restrictions to elective surgery as well as curfews and limitations on movement. In addition, in Victoria, the division suffered additional labor and consumable costs due to COVID-imposed measures, including additional staff, providing COVID safe measures and patients screening at all facilities on entry, especially public hospitals, and additional PPE. We also saw increased sick leave as staff, with any mild symptoms, were required to get COVID tested and isolate. There are also disproportionate costs compared to revenue related to maintaining service levels in hospitals. Outside of Victoria, however, revenue was up 7.6% on PCP, and this is underpinned by a strong hospital segment. With expanded sites and contract wins, the division is seeing savings delivered by the SIP program, as you will see later in the presentation. However, COVID delayed the completion of the iCAR project, our technology upgrade, at the start of the pandemic. And at the start of the pandemic, Victoria was the last state to be upgraded. This resulted in a delay to the decommissioning of legacy systems and some additional costs. Since the end of the Victorian lockdown, the performance of the Victorian business has improved significantly, with revenue in Victoria up 7% in January compared to PCP. Slide 7, our day hospital/IVF results. Our day hospital and IVF division had a very good first half, with revenue up 22% and EBIT up to $6.8 million to a combined EBIT of $5.7 million. You'll find the performance of each component of that combined business later in the pack. Montserrat had a strong half, driven by the continued ramp-up of the 4 new sites. Volumes in these new sites are up 33% on PCP. Our flagship short-stay hospital, Westside Private, in Brisbane continues to break volume records. And both the Healius day hospitals and our Adora Fertility business delivered maiden profits in the half. Adora Fertility performed well despite the impact of the Victorian lockdown. It continues to -- its quality low-cost offering, but is benefiting from selective price increases. Total cycles for the half are ahead of PCP with strong growth in frozen cycles in all states as the business matures. Looking at our corporate costs. We have made good progress in reducing costs down 11% compared to the first half last year, and we've taken significant steps to achieve our targeted $15 million in savings in group support costs, although some of those savings will sit at the divisional level. Now our trading update. The COVID pandemic continues to deliver a highly dynamic business environment. Short lockdowns tend not to have significant impact. However, longer lockdown, such as the one we saw in Victoria, clearly have a lasting effect on some parts of the business. Not only that, it takes some time after long lockdowns end for volumes to return to normal. So rather than the traditional approach to profit guidance, the Healius Board believes shareholders are better served by regular trading updates, and we plan to do that as necessary through the second half of this financial year. Our Pathology business through January and early February continues to deliver a similar trend to what we saw in the last 3 months of the first half. Non-COVID revenue remains up year-on-year on a working day basis, at the same time, COVID test numbers remain consistently above 10,000 tests per working day. However, numbers obviously fluctuate with the emergence of COVID outbreaks as we've seen recently. As part of our strategy to grow revenue streams, we are successfully targeting greater commercial COVID opportunities, and these include the federal government, sporting organizations such as the AFL, entertainment and travel companies. And you may have seen yesterday, we announced a new partnership with Flight Centre, which will see them become a strategic distribution partner of our Pathology services. COVID testing helps ensure a safer operating environment for organizations and our communities. These contracts may also serve to increase our overall testing numbers and counterbalance any future declines in community COVID testing. In Imaging, national revenue for January was 8.6% up on a working day basis. And at the same time, our Victorian Imaging business continues to rebound with revenue in January up 7% on a working day basis. The day hospital and IVF division has started this financial year significantly ahead of FY '20 and continues to contribute positively to the group's EBIT. Overall, we've started FY '21 very strongly. However, mirroring last financial year, it continues to be a fluid situation with COVID-19 and corresponding lockdowns. Our diagnostic businesses conduct critical Pathology and Imaging investigations. And even though non-COVID revenue has returned, some more routine but important checks are still being done at lower numbers than they were prior to the pandemic. However, as a country, we seem to be getting more used to the new normal. And with that, I would expect some of those regular checks to also return to what was a pre-pandemic normal. We expect that demand for COVID-19 PCR testing will continue beyond the introduction of vaccines. However, demand will fluctuate depending on local outbreaks. Restrictions in place for residents and international travelers, quarantine conditions as well as the speed, efficacy and availability of vaccines. Turning to strategy. Healius aims to be the leading customer-centric health care business, and we've made great headway in this space in the last 12 months. The COVID pandemic has highlighted the importance of the essential services that we provide and the resilience of our people and businesses. We completed the sale of Healius Primary Care, which consisted of our medical centers and dental businesses during the half. And this has simplified our portfolio, enabling us to concentrate on our specialist diagnostic businesses and growing short-stay hospitals. The proceeds from the sale have strengthened our balance sheet, providing us with flexibility and improved cash flow in addition to removing what was our most capital-intensive businesses. With a strong and healthy balance sheet, we are ensuring that we plan for sustainable growth into the future. We're setting the business up for sustainable growth through investments in digitization and technology, improving the customer and employee experience and exploring selective value-generating growth opportunities. We're also focusing on providing more transparency in our sustainability reporting. As I said at the beginning of this presentation, our people have been and continue to be integral in fighting the spread of COVID-19. And I for one, I'm proud to be one of Healius' more than 10,000 employees as we continue to provide essential, affordable and accessible health care services to our communities nationally. I'll now ask Maxine, our CFO and COO, to take you through our progress with the SIP initiatives and our capital management strategy. Thanks, Max.

Thank you, Malcolm, and good morning, everybody. One of our strategic priorities is continuing to critically assess our operations to identify further operational improvements to uplift performance. In SIP stage 1, we took an annualized $58 million in costs out of the business. This is equivalent to $70 million when adding in medical centers. We did this by realizing some of the more immediate cost savings opportunities, including rightsizing certain business functions. There are still some immediate opportunities, for example, further sourcing opportunities. To achieve the next step improvement in cost to serve, we believe we need to address more complex operating model and system changes. These require investment, more time to deliver and a widening of the program focused to a more holistic margin management view rather than solely a cost-out view. For a business with a large fixed cost base like ours, one of the most immediate ways to increase margin is to increase utilization of our fixed assets through revenue growth. But we need to be disciplined and customer-focused in the way we approach this rather than pursuing growth at all costs. For example, with our management of the ACC network and Imaging sites. In addition to margin management, there are a number of other business objectives we are concurrently pursuing as part of SIP stage 2 that are enablers to sustainable growth, and that include operating model simplification, technology adoption and evolving our customer proposition. In parallel, we have implemented strong cost controls to ensure the hard work in reducing our cost base is not reversed. We are tracking multiple categories of expenditure across the business. An update on where we're at in terms of the cost savings from the SIP program. At our December trading update, we communicated that we're up to $58 million in annualized savings from our executed initiatives, equivalent to the $70 million accounting for discontinued operations, delivering this ahead of plan. That's translated into about $23 million in savings in the first half of '21: $13 million in Path, $7 million in group services and $3 million in Imaging. You will see from our results the SIP program has translated into bottom line results. Comparing H1 '21 with H1 '20, we saw substantial business activity increase through the ramp-up of COVID-19 testing. Pathology processed over 1.6 million in COVID tests in the period alone. As a group, we were able to absorb this additional activity while keeping our cost bases tightly managed. Labor costs are the same as the prior comparable period, while revenues have increased by 16.7%. This is despite absorbing mandatory EBA increases across the business as well as gifting -- as well as gifting of 3 days of bonus Christmas leave to our staff. In other cost categories, consumable costs have increased as a result of handling higher test volumes, COVID-related PPE expenses, an increase in pricing of certain categories of consumables as a result of COVID supply chain disruptions. These were offset somewhat with consumables SIP savings delivered. IT costs have increased due to iCAR per click charges, where savings from iCAR are realized elsewhere. But we are also enacting plans to mitigate these cost rises with savings elsewhere in IT. Property costs are also flat. Going forward with SIP, to help accelerate delivery, we are wrapping out initiatives around 4 functional areas with close alignment in skill sets required to deliver and adding capabilities in these areas to the business. The 4 functional areas are digital and customer, network and segment optimization, workforce management and sourcing. The divisions have a clear initiative pipeline at different stages of maturity from scoping to some that are in the process of being rolled out. The program has cross-business sponsorship, and deliveries being tracked rigorously. Under digitization in Pathology, we're driving a holistic program of work in conjunction with LIS focused on end-to-end digitization of services for patients and referrers that goes far beyond the simple system replacement. These processes will touch every part of the value chain to create a seamless service experience. We will be strengthening our in-house digital capability, but also work with specialized partners for best-of-breed solutions. Our technology stack will be characterized by lean, modular, cloud-based solutions designed for scale with a single platform, supporting multiple Pathology brands across several geographies. Standardization is a given. For Imaging, we are in the final stages of completing the detailed service design for our digital clinics program, which will digitize the end-to-end customer journey. Go live for the first stage of functional release in early FY '22. In network and segment optimization, the ACC and Korea networks will continue to evolve towards a leaner and high-yielding network with the support of data analytics and technology. We are also moving towards a more segmented view of commercial opportunities and seeing good growth in some of our subspecialty areas. In Imaging, with the iCAR platform largely in place, we are now focused on increasing image platform access for the specialist market. In workforce management, we are undertaking multiple pilots looking at various ways we could help our staff be more effective and productive. These have been yielding positive results, and we will be refining these approaches based on staff feedback and progress towards national rollout near the end of this financial year. In conjunction, we will be rolling out a new electronic rostering system expected to go live in FY '22. Moving on to capital management. We announced the outcomes of the group's capital management review in our trading update back in December. The terms of reference of the review were to optimize the group's cost of funding, provide capital flexibility for a range of investment scenarios and increase shareholder returns. A couple of key outcomes to reiterate. Following the receipt of the Medical Centre sale proceeds and robust cash flows, we are returning up to $200 million to our shareholders through our currently active on-market share purchase plan. The program will be earnings per share accretive and be executed in calendar year 2021. Dividend payout policy has been set at a range of 50% to 70% of reported NPAT. This policy balances considerations of sustainability, shareholder returns, franking, gearing and ongoing capital needs. It is expected there will be sufficient franking credits to provide for dividends on a fully franked basis going forward. As Malcolm mentioned, we have declared an interim dividend of $0.065, representing 55% of reported NPAT for the first half. At this stage, we have taken a conservative approach, and we'll review full year payout when we have a clearer picture of ongoing trading conditions and our other capital management activities. Gearing targets have been lowered to 1.7 to 2.2x in the medium term. This provides for sufficient headroom to meet our capital expenditure requirements and buffer against a wide range of conceivable market scenarios. Group net debt is down $508 million from $666 million in June 2020 to $158 million at December 31, with a bank gearing ratio of 0.65x. The group had significant liquidity of $642 million at December 31, 2020. The group has reduced debt facilities by $295 million to $800 million, realizing $2.9 million in annual interest savings. We are continually assessing our funding requirements in the context of operating cash flows and investment opportunities. We may well reduce our facilities further to avoid unutilized fees. We also reviewed the group's interest rate hedge positions prior to December 2020. Healius had $400 million of interest rate swaps on foot. At the new drawn debt level of $222 million, the group would have been over hedged by $178 million. In December, we, therefore, closed out $170 million of interest rate swaps at an average rate of 2.73%. This had a $7.6 million negative one-off impact in H1 '21 on the reported NPAT of continuing operations, bringing forward the cost of cash flow hedges. On to the first half of FY '21, we had a strong result in our cash flows. Operating cash flows from continuing operations was up $90.4 million or 56% compared to prior period from $160 million to $251.2 million. This was also net of $63 million in deferred taxation and accounts payable from June 2020 enacted as part of our COVID cash conservation measures. This translated into free cash flow improvement of $106.1 million compared to the prior comparative period from $126.3 million to $232.4 million and cash conversion of over 90% without any adjustments. And if you add back the $63 million in payments from previous periods, this would mean a cash conversion of 106% for the half. This reflects improved operating cash flow and a reduction in spend. Capital expenditure for continuing operations was down compared to prior period from $54.7 million to $26.9 million, 11 of this differential was Montserrat earn-out payments. Looking at capital management going forward, we expect the group's underlying BaU capital expenditure rate to be similar to this period. Serum work area expenditure will continue through to the end of FY '21 and taper in FY '22 as most labs are completed. LIS expenditure will ramp up. There will be incremental CapEx from SIP and other strategic projects as new digital solutions are delivered. This CapEx will be stage gated for the next -- for each project, and full expenditure only approved when successful pilots or proof-of-concept are delivered. As Malcolm referenced, we have a pipeline of acquisition opportunities across our portfolio that we are continuing to evaluate. This will shape our capital spend in the medium term. Overall, we believe we have the balance sheet position to underpin both our portfolio growth strategy and our operating performance improvement program. Thank you.

We will now take questions.

[Operator Instructions] Your first question comes from David Low with JPMorgan.

Perhaps the first one for Maxine, please. The cost-out program, just looking at the slide there, there's a number of things that are in design stage and pilot stage. Just wondering if you could help us a little bit on the timetable of these cost savings coming through, and I presume where we'll be looking for that is in these margin targets in the key divisions.

Yes. Thanks, David. That's exactly right. If we talk -- if we reference back to the basis point improvement that we talked about in December, what we will see as we go through to FY '22 and '23 is each of those programs being realized in the divisions.

And should we read into that Slide 15, where, as I say, there's quite a few things that are in design and pilot stage that this perhaps is more back-end weighted? Or is there an even distribution as we this -- the margins increase?

Look, I think we are -- certainly on workforce management, we are more certain of outcome. Once we -- the digital and customer piece, given that is reliant on revenue. I think you will wait to see the results around those areas, network and segment optimization. Again, around the ACC network, that is very much a work in progress as we look at the network and evaluate any impacts on revenue. The supply chain piece around our Korea networks, again, is more certain in terms of what we're looking for in terms of the outcome. Sourcing, look, we've had some terrific wins in sourcing, and we just continue to push that down in the business, and that we certainly have got on foot renegotiated contracts, which you haven't seen in these numbers, which talking to our $15 million that we talked about in terms of cost out resulting from the Medical Centre sale, confident that we will be delivering that result on the timetable that we said.

So I didn't feel like I really drew you out there in terms of the timetable of the increase. I mean, do you think best that we think about this as being a smooth increase across '22 and '23?

No. I think in terms of your question of back ending, I would say exit '22 is exit run rate at the end of '22 is when we should be seeing the impact of each of the initiatives and full benefit going into FY '23.

Okay. And Maxine and Malcolm, I'm not sure, the trading update comment, is this likely to be a quarterly update?

Look, we haven't made a decision about how much or how often we do that, David. I think it -- that will be up to the Board to decide as to when that is, and it will depend on variability, I think, in terms of where we go.

Or just last one for me, perhaps again for Maxine. The corporate cost commentary, I wasn't 100% certain I understood. I mean, I understand the Medical Centres have been sold and there's implications there. But how should we think about corporate costs? And you made the comment that some of those costs would come through to the division. So again, that seems to be an offsetting uplift -- or sorry, pressure on margins in the division from the reallocation of corporate costs?

So look, the way -- I think I said this in December, the way I'm thinking about the corporate cost, pure corporate cost is that they will stay fairly steady. I think I said around $25 million, $26 million. We have had some direct corporate costs, such as D&O insurance increased quite materially. Most of the cost savings are the support costs that we manage on behalf of the divisions and in terms of the cost out that -- so for example, telco costs get allocated out to each of the divisions. So -- but we will be clear around what cost out we have achieved.

Your next question comes from Chris Cooper with Goldman Sachs.

Just back on the SIP stage 2 plan. So just looking through, I mean it does seem to me that, by far, the most important program we're talking about here is the LIS. I mean, clearly, there's a lot of work that needs to be done there. You're guiding to $60 million of CapEx over 3 years. Can you update us on when you expect that to start to be implemented and also what your plans are, I guess, to minimize any associated business risk with that implementation?

Yes. Okay. Look, the second part of -- I'll answer the second part of the question first and then come back to what we have earmarked in terms of capital. And part of our rethink around rollout of the LIS program has been thinking about any revenue at risk. It's not a small undertaking, as I think everyone understands in terms of standardization and in terms of systems upgrades in the LIS programs. That has been part of our consideration set. In terms of what we've earmarked for capital, we -- in terms of the ramp-up, like the program will be finished over the next 3 years. And in terms of the stage gating of the capital as that capital is released, we will report every half. And we don't have a perfect rollout program in terms of the technology pieces as we go through negotiations with vendors and look at our resourcing, but that's what we've earmarked for the program. We're comfortable with the envelope, and then it's about the phasing of that. And as I think we've said before, not front ending that spend as we focus on trying to get early delivery of benefits as part of the program.

Okay. So should we be thinking perhaps by the end of calendar '21, it sounds as though the implementation of the new LIS will be underway? Is that correct for the timing because I think...

Yes. So if you thought about the ramp-up of the CapEx, if you think FY '22, '23, '24 as the major periods for capital expenditure.

And the measures to manage potential business disruption risk around that period as well?

Look, it's really about any impact on revenue. And look, that's just something that we're going to have to manage as we go through. We're acutely aware of it. It's one of our key decision points as we manage the program. So I think that's probably all I can say at this point in time.

Okay. Just moving on to Imaging. So just to clarify, I mean you're talking to something around 8% to 9% growth in January, February on a working day basis. So would I be right in adjusting that to around about 6% if we're sort of trying to convert it back on to a 7-day week, which perhaps is more comparable with some of your peers? And if that is the case, I mean that probably does point to a little bit of underperformance versus some of the competition that we've heard from in the last couple of weeks. Is that a function purely of your geographical, I guess, overweight exposure in Victoria? Or do you feel as though you may have lost a little bit of ground in some of the other states through the period as well?

Yes. Look, it's a good question. It's primarily the impact of Victoria and particularly the hospital sector in Victoria. The interesting thing is one of our largest contracts in Victoria is the Northern Hospital, which is in the north of Melbourne. Now volumes through -- and the Imaging departments in the ADIA there. And volumes through the ADIA is still about 8% down on the same period last year. So it's interesting how COVID does seem to have an impact on people's willingness to access health care for some time after a long lockdown period, and it's been progressively recovering. But -- and revenues more broadly in Victoria have largely recovered, but they still lag a little bit behind the other states.

Okay. And just last one on Imaging, if you don't mind. You talked to the increased costs that were implemented to -- I think you said to manage the contagion risk and to maintain service levels. Could you quantify those costs and just give us some sense at this stage in terms of how you expect those to develop over the next couple of periods?

Look, we haven't provided that information. So I don't think we could do that on a call like this. But the -- look, our view going forward is that, absent COVID, that Imaging continues to recover from where it is. That's certainly how it looks. And that's our belief, and it should have a much more normal second half.

Your next question comes from Andrew Goodsall with MST Marquee.

Just on day hospitals, I don't think it made it into your trading update or I missed it, but just trying to understand what the exit rate was out of the half and how you've seen January, February. And if I could also just ask you to talk to the breakout you've given us at the day hospitals and just where you think the margins could go, particularly Healius day surgery?

Yes. Look, the trend out of the first half and into January and February was pretty much on the same progression that we've seen in the first half. So volumes in the 4 new facilities in the Montserrat hospitals were up about 33% year-on-year, and they have continued to grow. It's -- those hospitals still have capacity to grow for some time yet. So we haven't provided, obviously, a forecast in terms of where margins can get to over time. But the Healius, the former Healius day hospitals are certainly performing better. They're now integrated into the Montserrat management team, which -- and under Montserrat quality systems and management processes, and that's a process that will continue to reap benefits in that Healius day hospitals space. So look, I think we've got that segment up and running now with some really strong forward progression, and we would expect that to continue to ramp up.

That's great. And just perhaps on over to Pathology, just -- I know you don't want to talk about the regulatory intervention on your rent. But could you just give us a sense of what sort of happen to rents over the period? And then finally, what do you expect might take place with the price of COVID-19 PCR? Just what you expect it to hold it currently.

So rents as in what happened to our rents over that period -- over this period compared last year?

Yes. It's the same if things like court cases are useful in sharpening the conversation with rents?

Look, it's pretty difficult to make any comment about that given where it is from a legal perspective in terms of what the impact of court cases would be. It's very early stages, and it would be worthwhile reading the documentation that the Federal Health Department has put up on its website. From our own rents, our rents for the first half compared to the previous first half actually down in real terms. So with fewer -- 6% fewer collection centers over that period of time. And that's been in Pathology, and that's been that's been active management of that processes. I think we talked about previously that, that was our intention to drive them in that direction.

And just a view on the COVID test price, whether that will hold at 100.

Look, we think there's every reason why it should. Whether it will, that will be something that the government will make a decision about. I mean the price that is there does allow the kind of flexing of services rapidly, setting up -- finding new sites, setting up drive-throughs, ramping services up. To do that, you typically have to take on most providers to ramp up very quickly for a significant outbreak over a large area. You need to take on contracted labor in addition to the labor that they actually have. And so there are real costs to being able to flex the way we have. And so I think there's very good reasons why the fee should stay where it is. I guess time will tell.

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

The first one I had, just to clarify, Maxine. Am I right in hearing that the iCAR savings you mentioned is realized separate from the SIP program? And then the second -- and then to follow-up on that, just to want to understand, obviously, you said there were some iCAR delays in Victoria. Has that -- what's the thought now in terms of the magnitude of cost savings expected from iCAR? And has the time frame changed?

Thanks, Lyanne. So in terms of clarifying the cost savings, when I say it is included in Imaging's results, so being the film savings and also some administration savings. So -- which we expect to continue into the second half as well. In terms of the rollout, look, it was just a phenomenon of what happened in Victoria and not being able to get into access of sites. There's nothing more to be said on that in terms of rollout.

Okay. And my second question then is on Imaging. Could you give us a sense -- obviously, Victoria was significantly impacted by the lockdown. Can you give us a sense of where Victoria currently sits January, February as a percentage of normal? Has it fully come back yet or still a fair bit below?

Look, into January, it is almost back to the growth levels of the rest of the country. So it's Imaging revenue in January on a working day basis. So the reason we say on a working day basis is there were 2 less working days this January than they were in the previous January. So -- and that's up 7% year-on-year, whereas Imaging on a national basis is up 8.6%.

Our next question comes from Gretel Janu with Crédit Suisse.

Firstly, just on Pathology business. Can you just clarify what was the base business performance in the half? So you caught up 5% currently, but, yes, just for the December half, what was it?

We haven't provided the percentage overall. But if you look at what market rates have been, we've largely tracked the market almost identically, in fact. Looking at the Medicare...

Okay. So that's implying some growth.

Yes.

Okay. Understood. And then just in terms of Montserrat hospitals. So clearly, you've done very well. I guess, how much do you think of that growth that you've achieved in the half was catch-up due to pent-up demand? And I guess what do you expect the growth profile will be on this business? And when do you think we'll get to a more normalized level of growth there?

Well, look, there's still significant capacity. The largest facility, Westside Private Hospital is still less than 50% utilization. So it's got quite a bit of room to move. And when you start-up a new facility like that, the specialists and the surgeons that use facilities, new facilities like that are often younger specialists who are building up the practices of their own. So as their practices grow, then the volume within facilities like that continue to grow as well. So it's got quite some way to go in terms of where it could go from there. We've also got -- we've built a pipeline of potential M&A around existing day hospitals around the country. And we have targeted several sites, one of which were well down the pathway with -- for greenfield developments that are like Westside. So we really believe in this short-stay hospital space. It's -- we see short-stay hospital as in the Westside facility is somewhat different to the traditional day surgery that probably the sector has been probably more known for in the past.

And I might just add one thing on the question on the margin. So in terms of -- even though Malcolm mentioned just at that 50%, just below that 50% capacity level for Westside, the EBIT margins that we're getting are extremely attractive and will be beyond our expectations. So further growth there will be certainly very valuable to the business.

And then just finally, just on costs. So well done keeping the employee expense flat with -- having achieved strong revenue growth. I guess going forward then, do we anticipate the employee expense line to decrease once revenues normalize post-COVID?

Well, look, obviously, that's what we are managing towards everyone within the leadership team broadly. It is the #1 operational KPI, he's managing labor against where revenue is. I mean, I think we've demonstrated we've been able to do that. And actually, I'd say, being able to do it with actually out -- without the kind of tools that we actually need to do, it is far more dynamically. And certainly, that will benefit us rather than looking at labor in previous 2 weeks period. We actually do want to get to a predictive labor model in day and hour level. So I expect our performance around labor management will be more sophisticated in the future than what it is at this point in time, but it is a key focus area for the business. So looking to repeat that performance.

Your next question comes from Saul Hadassin with UBS.

First question for me. Just as it relates to that margin expansion target by FY '23. Can you give us a sense on the revenue side of the business? What's your sort of medium-term forecast regarding revenue growth for both Pathology and Imaging sort of post-COVID normalized? What revenue growth rates are you assuming to help you get those margin targets?

Yes. Well, what is normal? I'd love to know the answer to that, post-COVID. Look, I think we talked in December that we had some pretty conservative underlying growth percentages. I recall around about 4% was our assumption around base revenue growth. So look, it may be above that, but that's what we've planned in the formulation of getting to that margin uplift.