Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Healius 2022 Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Janet Payne. Please go ahead.

Good morning, ladies and gentlemen. And yes, welcome to Healius and to the first half of our financial year 2022 results presentation. Malcolm Parmenter, our CEO and MD; and Maxine Jacquet, our CFO and COO, will take you through our presentation, and then we'll open up for questions. So without further ado, Malcolm, over to you.

Thanks, Janet. Good morning, ladies and gentlemen, and welcome to our results presentation. I'm very pleased to announce our first half '22 financials, which are a beat on consensus. Now obviously, the large number of COVID PCR tests we undertook in the period was a prime driver of our growth. And this would not have been possible without the ongoing selfless efforts of our people, especially those in our Pathology division. Once again, they've risen to the challenge of unprecedented demand for COVID PCR testing, which has been running strongly all period, but particularly in December and January. In recognition of this extraordinary effort, we've put aside funds to reward those who went above and beyond in this 6-month period. But the first half wasn't just about COVID testing. Most pleasingly, our revenue was also driven by strong business as usual trading when assessed against the backdrop of the inevitable constraint that COVID outbreaks placed on core health care services. As impressive was our control of the cost base in an increasingly inflationary environment with labor, property and IT costs all well controlled. Labor costs were 37% of revenue compared to 44% in the prior comparable period, demonstrating economies of scale from high volumes and good control through our Sustainable Improvement Program or SIP. We've also had several very good procurement wins, although this is masked in the results by the sheer volume of the COVID consumables. Gross operating cash flow followed profits being strong in the period. Our cash conversion was over 90%, taking into account the high volumes over the year-end. Now we'll come back to talking about growth later in this presentation. For now, let me just expand on our returns to shareholders in this period. We completed our announced buyback in this half, spending just over $100 million and paid a further $40 million in dividends. In terms of dividends, the Board has determined a payment of $0.10 per share as the interim dividend. And this compares to an interim dividend of $0.065 per share for the same period last year and $0.0675 per share in the second half. Now if you turn to the Pathology slide and turning to the performance there in more detail. I think Pathology's extraordinary results speak for themselves with EBITDA up nearly 200% on revenue growth of 56%. And I'd like to highlight just a few points. First, our COVID revenue was up an extraordinary 267% from the Delta and Omicron outbreaks, and we certainly punched above our weight. Our ability to flex up and down, to roll out new drive-throughs and respond to demand underpinned this increase. Equally critical to that success was the investment in additional testing capacity that we announced at the FY '21 full year result. As importantly, our core or business as usual revenue was up 3%, a good outcome when you consider we achieved this on a significantly smaller ACC footprint. That smaller footprint was the result of a planned reduction over the last 2 years and is precisely what we've been aiming for. Growth in the core business included a strong performance in our non-MBS revenue and especially our commercial channel, including specialty vets and genetics and a rebound in hospital referrals in Victoria. The above-market core revenue growth was particularly pleasing given the many more weeks of COVID lockdowns and elective surgery restrictions across multiple states that we saw in this half compared to pcp. Lockdowns and the fear of infection both mean people access core health care less often, albeit offset by higher COVID testing. The reverse is also true, with reasonably strong rebound in core services once those restraints are removed. Seeing this pattern of core growth slowed through lockdowns and high infection numbers, then surged back as the threat recedes, gives us confidence that a backlog of routine testing does exist and will remain through this next phase of the pandemic. Now another exciting development in our Pathology division has been the acquisition of Agilex Biolabs. And as we go forward, the results for our Pathology division will include Agilex. I'm particularly enthusiastic about this company as it is a great pathology business with an experienced team in the rapidly growing clinical trials market, and we're confident we will see revenue growth above the 15% we mentioned in December when the acquisition was announced. And Maxine will provide you with some more color on this later in the presentation. Turning to the Imaging slide. Our Lumus Imaging results reflect what's been happening in the market over the COVID outbreaks, the lockdowns and elective surgery cancellations. Against this backdrop, our trading has been above market in 2 of our biggest states, Victoria and Queensland, the latter assisted by the Axis Radiology acquisition, which came into our fold in this period. Victoria was especially pleasing with a strong bounce back there in the early months of the period. As I've said before, our Imaging hospital contracts once won a quasi-monopoly. You do see a strong return of Imaging volumes when activity comes back into the hospital. Our New South Wales operations were impacted in our Southwest Sydney heartland during the Delta outbreak. And to give you an idea of the scale there, southwest Sydney is about 1/4 of Sydney Metro's revenue. And in that region, it was down about 25% during that period. In the medical center channel, greater telehealth consultations and GP shortages have affected referrals where we are co-located with the former Healius Medical Centres. In another area of that business, a significant contract for Lumus Imaging is the Imaging contract associated with the BUPA visa immigration medical service. With closed international borders over the last 2 years, there has been a dramatic reduction in visa applications, resulting in lower immigration medicals and imaging. With our borders opening up, we're already seeing volumes rebounding strongly in February, now well ahead of last year. And BUPA, along with Lumus Imaging as a subcontractor, has retained the visa immigration medical's contract for a further period of up to 7 years from July this year. AI is very much a focus for our Imaging and Pathology businesses, but in Imaging, the focus there is on X-ray and MRI, where we're already using Qure.AI, which can triage X-ray scans and allow radiologists to rapidly detect and confirm cases of TB. And that's particularly useful in our immigration contract. We've partnered with the University of Sydney Medical School, the School of Computer Science in the Western Sydney LHD to evaluate AI interpretation of chest radiographs for TB within an Australian migrant population. This solution is currently running across 250,000 immigration studies per annum. And we're exploring further functionality for this solution and other AI products in the market. On the Imaging cost side, the team has done a great job controlling site labor in this half, which was down 4% year-on-year. However, this was somewhat offset by higher radiologists locum costs resulting from a national shortage of radiologists. As we promised, we have included our Imaging SIP initiatives and underlying costs with about $2 million difference to last year's figures baked into those numbers. And finally, our Axis acquisition is going very well with revenue and EBIT above expectations in the period. Turning to the day hospitals slide. Day hospitals have delivered revenue in the year that is flat year-on-year, and that's an achievement in itself given the COVID interruptions in the period. Pleasingly, Westside Private, our flagship hospital, was up 24% in the half, continuing its strong growth story. In terms of costs, COVID brought an additional burden with staff retention during surgical restriction, patient cancellations and the like. We also added resources to help build the development pipeline, and this, of course, has impacted our corporate costs but will have its own rewards. The comparison to the first half of 2021 is impacted by support payments last year. And as you know, our JobKeeper payments were already paid in the second half. We announced the development of the Murdoch Day Hospital at the AGM, and it's going well with the build schedule to complete around July 2024. And we have a couple of potential acquisitions in the wings in the near term and a good pipeline of greenfield and roll-up opportunities to help deliver the growth strategy. On the corporate front, the corporate slide. I won't dwell on our corporate costs as Max will address that. But suffice it to say, the first half figures are where we expected them to be and in line with the second half of last year. In terms of the trading update, I want to spend a little bit of time on this as there are some important things, I think, to consider here. First, looking at our business as usual trading in January and February. The second half started off in a similar vein to the first with volumes now progressively picking up. We expect them to continue to get stronger with the Omicron peak subsiding, elective surgery resuming and community concerns over accessing health care decreasing, all at different times in different states. There is certainly known underdiagnosis of disease and a backlog of surgery, which we will see coming into the pipeline. We anticipate an acceleration in demand for routine health care to drive growth over the near term, and Healius is well placed to deliver on this acceleration. With the opening of the borders, we should also see overseas-trained doctors returning to our shores, to our hospitals and medical centers, especially in regional areas, and this will increase referrals to our diagnostics divisions. In terms of COVID PCR testing, test per working day seem to have settled to around 15,000 to 17,000 per working day, and this compares to about 10,000 per working day at the same time last year. The high volume of testing that was occurring in December and January in New South Wales has certainly dropped, but this is partially offset by higher levels of testing in the other states. It's likely, in our view, this base testing -- base level of testing will continue through to winter, barring further outbreaks. In terms of COVID, the disease, I know we all want to believe that it's going away and we'll go back to life as we knew it. And like everyone else, I've had enough of this virus. In fact, I had it myself and my family did, as many of you probably had as well. However, Healius is a science-based organization and wishful thinking won't get us there. There are a few aspects of coronavirus that we now know with a reasonably high degree of certainty. The first is that the virus has a greater capacity for mutation and evolution than was initially thought, and variants of concern have been turning up every 6 months or so. The virulence of each new variant of concern is varied, some worse, some better. Alpha, more virulent than the original Wuhan strain. Delta, more virulent than Alpha, followed by Omicron, which is less-virulent but similar to the original Wuhan strain. The evidence suggests this pattern is likely to continue with some variants worse, some better. We also know that vaccines are effective, but immunity wanes reasonably quickly, and immunity from infection also wanes reasonably quickly. What's more, the virus has shown itself capable of some vaccine escape. The pattern of outbreaks is that they come in waves or epidemics. And when the scientific community talks about the virus becoming endemic, that is what they mean. Now armed with this knowledge, the science says it's quite likely there will be another round of COVID this coming winter in Australia. Unfortunately, this may be in tandem with influenza, given Australia has seen very little flu for more than 3 years. And if this occurs, and particularly if the next variant is more virulent, PCR testing, along with tracking, tracing and self-isolation will again be the mainstay of our response to avoid lockdowns and limit spread as much as possible. Now PCR consistently detects COVID 2 to 3 days earlier in an infection than a RAT does. The problem with rapid antigen tests in the situation of more dangerous variants of the virus is that they leave infected people out and about in the community for longer. PCR testing also has the advantage of being able to diagnose whether the infection is COVID, influenza or one of several other respiratory viruses, something that is important in a situation where not every infection in the community is COVID. When it comes to tracking and tracing, many people don't register their positive rapid antigen test result, as evidenced by the fact that now around half of registered positives still come from PCR testing. Keeping our economy open is not just about avoiding lockdowns, as we've discovered in a rather painful way in the last couple of months, it's also about keeping the number of infections under control. And in the event of variants, more virulent than Omicron, that can only be done with effective testing, tracking and tracing. Now we probably have a window of opportunity between now and winter to learn from the past, improve the national PCR regime and be ready for whatever comes in terms of variants. From a scientific perspective, RAT tests probably haven't added much value to the control of the recent Omicron outbreak. But by the same token, PCR tests that take days to come back also have little utility, and I think we can do better. With the science in mind, Healius has been investing in improving both the efficiency, the cost per test and the capacity of our PCR testing to allow our laboratories to flex up and down as required. We have set our targets at consistently delivering PCR results in less than 12 hours in metropolitan areas and less than 24 hours in regional areas. There are new rapid PCR machines making their way through TGA approval, and this should improve turnaround times in regional areas in particular. In a world where COVID wishful thinking is the order of the day, this might all sound a bit bleak. I don't mean it to be. We've come a long way, and there is a pathway to safety from COVID. It's just that I don't believe Omicron on its own is that pathway, rather better-targeted vaccines are likely to be the solution, and we could start to see them before the year is out. Even in that world, COVID will likely remain a dangerous infection, especially to the unvaccinated, and doctors will continue to use PCR tests to identify those infections. Now let me move to a couple of other matters before I hand over to Max. The emergence of inflationary pressures in the supply chain has been a theme in this reporting season. At Healius, we are managing our costs well and the financial metrics bear this out. The SIP program gives us further opportunities to improve. We're also very focused on enhancing our people development, recognition and communications initiatives as well as our green credentials. We need to be able to attract and keep the best people. And the improvements to our brand and value proposition will help us as we respond to the skill shortages in Australia. Finally, I've said a couple of times in the closing remarks at our stock exchange releases that I see this period of cash inflow, both from COVID revenue and from the lessening of capital requirements through the selling of medical centers, as a real opportunity to invest in leading-edge digital applications which can permanently change for the better how consumers access diagnostic health care in Australia. These are not just empty words. We're now well down the path of bringing our digital initiatives to life. These applications, as they come to life over the next 2 to 3 years in our laboratories, in our imaging centers, our collection centers, in our doctors' offices and on our doctors' and patients' mobile devices, will significantly improve the way we all access and experience health care. At Healius, we have a great team and a great chance to jump to the front in our consumer and our B2B offerings, over the next few years. We will need to invest some capital there and will -- but will certainly benefit from these changes. So with that, let me pass you over to Max. Thanks, Max.

Thanks, Malcolm. Good morning, everyone. I'd like to spend a few minutes on our capital position, margin performance and the portfolio. Turning to Slide 8. The objectives of our December 2020 capital management review were to recalibrate our capital structure and minimize cost of capital while providing sufficient flexibility to meet business growth and shareholder returns. Underpinning our strong balance sheet and low gearing were the operating cash flows generated in the half. As you can see from the slide, gross operating cash flow increased by 43% to $408.3 million. Our EBITDA conversion was well over 90% after adjusting for the significant revenue surge during the last 2 weeks in December when Omicron took hold. The strong cash flows obviously reflect the significant revenue growth during the period but also careful management of capital expenditure and working capital, focus on controlling operating expenditure, the lower capital intensity of the group following the divestment of Healius Primary Care. This has also allowed us to consider alternative funding mechanisms. For example, in Imaging, we purchased new and replacement equipment to take advantage of better rates and our lower debt levels rather than leasing that equipment. As you can see from the slide, organic CapEx was $42.4 million for the half, including $26.3 million in Imaging. Inorganic CapEx was $48.6 million and comprised $36 million for the final Montserrat earnout and settlement and the $12.6 million for the acquisition of the Axis Radiology business. In the next 6 months, we expect to spend approximately $65 million. A large proportion of this spend underpins the digital and LIS program in Pathology. In addition, we are investing in lab capacity, some of which can be used to improve COVID testing efficiency. As Malcolm mentioned -- as mentioned by Malcolm, the group completed its on-market share buyback program in December 2021, purchasing 44.3 million shares at an average execution price of $4.47 for a total purchase value of $198.2 million. Net debt at 31 December was $221 million with our bank gearing ratio at 0.4x, the lowest in recent history. Our low levels of debt allowed us to significantly reduce finance costs to $25.3 million in the half compared with $36.2 million in the prior comparable period. At the end of January, net debt levels increased by $293 million as we finance the acquisition of Agilex. Healius' strong operating performance and associated cash flow generation positions us well for growth in the future. Turning now to our margin expansion agenda. We've already made substantial progress across all levers of EBIT performance under Phase II of the Sustainable Improvement Program or SIP. Slide 9 highlights the early results of these initiatives on cost. In the first half of the year, total business activity was up strongly, with revenue up 43% compared with the prior comparable period. Cost growth in comparison was well controlled despite increasing inflationary pressures. In particular, labor costs half-on-half were up only 19%, and our labor expense reduced to 37% of revenue compared with 44% in the prior comparable period. This reflects the economies of scale implicit in the business, a number of SIP initiatives improving the productivity of our workforce and careful management of wage inflation. Pleasingly, Imaging delivered a 4% reduction in same-site support labor. The increase in dollar value of consumables expense was wholly explained by the increase in COVID testing volumes despite achieving significant price reduction in COVID-related consumables. In addition, our SIP sourcing program achieved a 5% reduction in consumables spend in BAU Pathology. As a percentage of revenue, consumables expense remained consistent with the prior comparable period. All other costs tracked lower, contributing to the strong margin growth. Property and IT costs, in particular, benefited from SIP initiatives targeting demand, sourcing and spend control. The increase in ROU asset depreciation reflects a full 6 months expense for the third-party leases for medical centers. Other depreciation costs increased due to equipment purchases in Imaging. Turning to Slide 10. Most of the SIP initiatives have been scoped and designed and are now in implementation. I'd like to describe some of the progress we've made in the first half. Imaging same-site revenue growth includes the national rebranding to Lumus Imaging, where we're aligning our online presence with our physical network. We have also expanded our capacity, invested in higher-margin modalities and are increasing our out-of-pocket fees. In Pathology, our revenue performance highlights traction being made in non-COVID commercial initiatives and the specialist segment. As Malcolm noted, our BAU revenue growth was above market. For initiatives in our laboratories, we have paced this effort given COVID testing priorities and the requirement for a higher labor complement. However, we have fast-tracked areas such as digital pathology and vets and commenced work in other areas such as anatomical pathology. Now turning to our digitization program. This covers the 5 key service areas of referrals, collections, tests, RAT results and billings. We have been prioritizing referrals and collections. To that end, we have built and launched an electronic referral solution for doctors to send pathology requests via SMS to patients. So far, we have launched the first release of the solution in Laverty. We've also built and launched a collections portal for staff and ACCs to register a patient when they come in, put through test orders and collects specimens. Our rostering program will provide cost transparency, standardization and opportunities to better flex labor according to demand. We have delivered the first phase of a 4-phase process. Many productivity initiatives from sourcing are already delivering savings. Over 40% price reduction on a number of consumables, over 20% cost savings from outsourced radiology reporting and transcription services, around 15% savings for facilities management, 3PL and imaging software licenses. While a lot has been achieved, there is plenty more implementation to come and the financial benefits associated with that. As I've said before, the margin benefit should come through in the exit run rate out of FY '23. Turning to the portfolio on the next page. Over the last 18 months, we have established the right capital conditions and flexibility to be able to pursue growth more rapidly. We are investing in our capabilities, technology and assets to drive a high return on invested capital from the core businesses. We have acquired Axis Radiology, Agilex and commenced development of the Murdoch Day Hospital. The Agilex acquisition provides a platform in the high-growth, global market of clinical trials. Having spent time with the Agilex management team, we are confident that the business will exceed our acquisition case, particularly in the largest and most established areas which are mass spectrometry and immunoassay. We are also deepening the service offering in vaccines, toxicology, immunobiology and gene therapy. Furthermore, Healius' general pathology and genomics capabilities will enhance Agilex's offering around areas such as immunohistochemistry and sequencing and genetics. Overall, the ambition is for Agilex to be a one-stop shop for bioanalytical services with the ability to compete all the way from preclinical through to Phase III trials. To accelerate this, we are evaluating bolt-on opportunities, most likely in the U.S. and Asia Pacific. We will spend some time on our plans for the portfolio, including Agilex, and provide you with an opportunity to meet the team at the Investor Day, out of reporting season and in the next couple of months. Thank you.

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

Can I start with the base business in Pathology and also the Imaging business? Obviously, we understand that, that's recovering as the different regions come out of COVID restrictions. But is there anything that you can point to that might suggest that Healius might recover faster than its peers?

Look, hard to say the answer to that. I mean Pathology is not -- and Imaging are not sort of one-uniform business that everybody has the same exposure to different components of the market. So it's those different components of the market that respond differently. So if you think about Healius in Pathology, for example, we have a fairly significant business in public hospitals in Victoria, for example. And what happens there, given COVID and elective surgery restrictions and things coming and going, actually, is different to what happens in community pathology in terms of how that works. So it's a little hard to say through this period as to exactly who benefits and who doesn't, I think, is the reality of it. The thing we do see though is as the waves of COVID go, you get significant bounce backs in between in terms of volume. So you're getting this swing from one to the other. And it's that, that says there is quite a backlog of work that's there, probably for everybody across the industry, I think. But the reality is, I think it's there. It's certainly there in Imaging. About 40% of our -- or thereabouts of our Imaging revenue is in hospitals of one kind or another. And having elective surgery restricted significantly, like it has been, has a big impact on the amount of imaging. A lot of the imaging is pre- and post-operations. So with that not happening or only limited to urgent stuff, that has a big impact on it. So when the hospitals open up, those imaging centers, the work is -- simply it flows back into them. It's as simple as that. They sit there in a market of their own. So it's that kind of environment that we're in. And if we get a run now without another way for a while, my guess is that both businesses and day hospitals as well for that matter will rebound pretty strongly.

And then if we could stay on, I guess, forecasting in terms of Pathology, you called out that commercial testing had some good growth in the first half. Can you provide some more color on that?

Yes. So look, we've got this commercial testing a range of things. This is non-COVID commercial testing, of course. Some of this is commercial in COVID as well. So our hospital contracts, we have -- although in terms of the total Pathology business, it's relatively small. We have a veterinary pathology business. And veterinary services have been pretty strong as has veterinary pathology in that space. And genomics has a commercial component to it that's non-MBS as well. And they've been the key areas that have been growing quite strongly for us.

Okay. And just if I could fit one more question in around COVID testing outlook. You mentioned that you expect the baseload of testing to remain, is this largely community testing? Or are there any sort of contracts and travel arrangements that you have in place that might, I guess, prop up your COVID testing over the near term?

Yes. Look, there are. And look, the travel -- I mean, a lot of COVID -- there is a chunk of COVID testing that's determined by the regulations and what people are required to do for entry to various countries. And we certainly do have some -- a number of contracts in terms of travel that we've established over time that are part of that. But realistically, if you look at it, I mean, PCR testing is run pretty much as the disease has run, and it settles back into a sort of baseload of testing. So without the restrictions in place, you end up with people with viruses other than COVID, and that needs to be identified. So people with colds and sore throats for other reasons end up having COVID testing and a percentage of people have PCR. I mean you probably -- I mean, everybody on this call has probably done a RAT test. It probably doesn't surprise you to know that not everybody in the population is capable of doing that. The elderly population, for example, being able to do a RAT test is -- it's -- you've got to have reasonably good hands. And if you're arthritic or any of those things, it actually becomes quite difficult to do. It's just PCR testing also picks it up earlier. I don't know how many people on the call have been doing RAT tests and you kind of got sore throats and you're feeling sick. And for 2 days or so, the RAT test is negative before it becomes positive. It's a pretty common event. And so people, if they're worried in that situation, will go and get a PCR. If you're going to visit your elderly parent in a nursing home, then you want to know for sure. You don't want to be going there with a sore throat and a negative RAT test. So there is this baseload of PCR that will continue to happen. And as other viruses come around and RAT tests are negative in those environments, sometimes people want to know what it is. And so I think, it does get to this baseload of PCR that just continues on in between until we lose all sort of fear of COVID. And as I was saying through the talk, I think that's a way off here.

Your next question comes from Gretel Janu with Credit Suisse.

If I could just start with the SIP program because it is getting very difficult for us to really unpick how you're going relative to the 300 basis margin improvement target by 2023 outside of COVID. So are you able to give us some indication how progressed you are? Like are we halfway there, 2/3 there? And particularly on Imaging because I think you were looking at targeting Imaging EBIT of $60 million to $65 million in FY '23. You've recorded $12 million in the half. So yes, it has been COVID-affected, but it's still quite a way off that target. So just some more color around this would be great.

Thanks, Gretel. Look, you're right, the targets for Imaging were the combination of base revenue, which we talked about before, and the SIP program. Look, we are where we expect to be in terms of implementation. I know it's hard for you all to see through. This is not a -- these are not quick-win initiatives. It is about implementing infrastructure across a network of 140 sites and the change management that goes along with that as well as getting to that return of the base business in Imaging. So look, we are where we expect to be in Imaging. And look, we're still pretty confident about those targets. And I think, in the last call, we talked about the exit run rate of being FY '23. Look, we should see some improvements, assuming we get that baseload capacity coming back in Imaging to see that build up in terms of margin improvement. But pretty comfortable where we are at this point in time. And looking in Pathology, as I said in some of those highlights, we've -- particularly, I mean that was a pretty concerted effort, a focus around non-MBS growth and also the ACC network optimization piece, and we're pleased with how that's translating into revenue. And we see more opportunities in that area. And in terms of the other initiatives around the digitization and the LIS program, again, trying to accelerate that and comfortable with the progress that's been made there with those couple of highlights I gave earlier. The only area that has been deliberately deprioritized at this point in time is rightsizing pathology lab labor for very good reasons because we are not at normal labor levels within pathology, as I'm sure you can appreciate. But that doesn't mean we are slowing down the core tool that is required, which is the dynamic rostering program in Pathology, which -- so where Phase I and Phase II will be in the next couple of months. So again, not pushing the technology and enabling capabilities that we need on that side of things. So look, comfortable where we are. And it will be good to see a normal return of normal trading activity, particularly in Imaging, so we can see some of the results, particularly on the margin side in Imaging.

That's helpful. Just following on 2 collection centers there. So you did do further network optimization in the half. Was there any revenue leakage from this? And so just from your comments just then you expect that there's still further optimization ongoing, is that right?

Yes. But that doesn't mean -- that certainly doesn't mean cutting medical centers. We're at 2,027 sites. So look, we -- I probably don't want to say too much on the call, but we do see this is a -- as an opportunity for growth. And so you can read from that what you will. And yes, there was some revenue leakage but revenue that was highly unprofitable and, again, with a good retention of some of that revenue going to our existing ACC. So still very comfortable with the decision that we made around that network footprint.

That's very helpful. And then just finally, on the dividend, only a 24% payout ratio in the half. So have you departed from the payout ratio target of 50% to 70%?

No. We haven't. Obviously, our payout ratio sits between 50% to 70%. It's -- look, this is obviously a challenging one. This is a period of supernormal profits. And as a result of that, we've got a dividend which we feel is our appropriate return to shareholders given what we see as the ongoing growth needs of the business. So trying to obviously balance that. It's never easy to get that exactly right for everyone, but not stepping away from that policy. But I think when we get to the Investor Day, we will be talking more about capital management, and perhaps that's the time to address that question more fully.

Your next question comes from Andrew Goodsall with MST Marquee.

I was just going to ask on the M&A front, just post-Agilex, how you're thinking about your capacity for M&A in terms of both your debt metrics and also your ability or capacity to integrate further M&A?

Thanks, Andrew. Look, we -- a couple of things. We are going through a refi at the moment, and we will probably lift the facility a bit from where we are today. The kind of acquisitions that we are looking at with the Agilex business are acquisitions that they had on their radar, which are highly complementary in terms of additional capacity in their growth areas. They're pretty small-scale, so we have essentially about $300-odd million to -- and that's not what we have earmarked, by the way, but it's just the capacity when we go through the refi. So they are small-scale. They will be incremental. And again, Andrew, not to put you off too much that's probably something that we would love to go into a lot more detail at the Investor Day when we get the Agilex team up and we can talk about the core areas of growth and both the organic growth and the inorganic growth opportunities in that segment.

Okay. And so outside of that segment, is there other M&A that you're, I guess, considering or looking at to buy?

Yes. Look, we're constantly running the rule over imaging acquisitions. There is -- it's still a reasonably fragmented market. It's a competitive market, but still running the rule over imaging acquisitions, particularly where they're complementary to our existing business, the long hospital contracts and things like that. And similarly, in the day hospitals, we've got a pipeline of good acquisitions that we're currently working through, so definitely some thinking around how we continue to grow that business.

And you take your gearing ratios back up to sort of normal.

Yes, I think so.

Sort of conventional ratios to do that?

Yes, that's right.

Okay. Great. And then I think Malcolm just was talking about the recovery, particularly in the day surgeries business. I was just wondering whether you start to see any forward-dated bookings improve at this point as the states remove their restrictions?

Yes. Look, I think absolutely, Andrew, it -- there clearly is a backlog there. And look, we would expect that some of the other things that we used to see a lot of in the past that there's been less of in the last 6 months have been kind of public work that's referred into the private sector as well. We would expect to see that start to come back as well as we look to catch up. I mean there is a big backlog of surgery out there, but a whole lot of routine stuff that just needs to be done around colonoscopies, eye surgery and things. During -- there is a general reluctance to access health care when the sort of news feed is basically telling people you can go to a hospital and you can -- like going to McDonald's and getting fries with that, you'd get COVID with that. So it's -- that kind of environment where we're talking about sort of not isolating hospital staff when they're exposed to COVID and still coming to work does tend to frighten people off. And that's -- that fear is going away quite quickly at this point in time, and we're starting to see those bookings extend out and surgeons extending their lists.

We did -- just to add to that.

And -- Go ahead.

I might just add a couple of points to that. We actually have, in Westside, we've seen actually some of their highest-procedure days. So you tend to get a lead time of a month, obviously, a month out and then 2 weeks out. And so what we have seen is list can be completely full, and then you get a lockdown or you get staff shortages from sickness and the list get cancels, right? So we think as soon as you get that clearer, we've seen moments through the last 6 months where not only returns to what was budgeted, but also there is rebound.

Okay. And just a final housekeeping for me. Just trying to understand CapEx in the second half. You did mention this $65 million, but I didn't quite catch sort of how you're thinking about CapEx in the second half.

Yes. So look, the CapEx for the second half is that -- the lion's share of that will be in Pathology and will be -- and so there's a chunk that will be spent on the LIS and the digital piece. You'll notice CapEx for Pathology in the first half was quite low, and so that will pick up in the second half as we enter into these contracts and spending out on some of the infrastructure, particularly for digital and LIS.

Do you have a sense of the absolute number there in terms of group CapEx?

For the second half, we said $65 million.

Your next question comes from David Low with JPMorgan.

If you could just start with the day hospitals, just wondering -- understanding where IVF is at given the Brookvale transaction. And while I'm on the topic, I mean, I think revenue is flat overall, but Westside has got 24%. So presumably, something went backwards. Could you just elaborate a little bit on that, please?

Okay. Thanks, David. So look, the areas at Westside was up and the areas that were down were the sites which were impacted in New South Wales with lockdown and also some of the government contract work which was canceled.

Okay. And just the IVF business, that's still to be sold?

We would have hoped to have said today that it's sold, but it's -- we're hoping that it's imminent.

Okay. That's very clear. The other question I had just around COVID testing margins in recent weeks and months. I mean we have certainly seen positivity rates go up. We have talked about pooling being pulled out of the system because it's just not viable with higher positivity rate. Just wondering what that means for margins. And then perhaps if I could broaden that into a discussion of if we see COVID get back to that base level that Malcolm talked about, what does that mean for margins given there are a few moving parts in there with probably reimbursement down, imminently consumables costs down, maybe pulling at lower levels, all that. If you could give us a little bit of insight, please?

Yes. Thanks, David. Look, we -- in terms of pooling in our Pathology business, we rarely went above pooling 2 in 1. So it's not a massive shift for us in terms of where it is. There's clearly a manual component to pooling in terms of the people required to do that as well, plus the investment that we're currently doing in terms of efficiency around the kinds of machines we use, the number of people that, that requires, et cetera, et cetera. So I think the -- yes, pooling does make a difference to it. If the numbers of cases drop right away, then you can go back to doing some pooling. But we'll need to take that as it comes. I mean clearly, if where we were in late December and early January where the positivity rate on PCR testing was running in the high 20%, it's -- pooling becomes pretty much a useless exercise in that kind of scenario. So look, I think we've obviously got a fee cut as well in -- for COVID testing in this -- in the second half, that's in there. But all of those factors together mean the margins on PCR testing are still reasonable.

Do you think they'll be lower though? I mean given volumes are so high. New South Wales lockdowns and then into the end of the year, I presume with volumes that high, margins go up pretty nicely as well. And the absence of that sort of level of demand, we would expect lower margins just because of the fixed cost leverage.

Yes. Look, it's true. I mean -- but high volumes mean you've got labs running 24 hours a day, lots of overtime, lots of casual labor. There's a bunch of other costs that actually go with that kind of running. The collection center is also running in -- at least the drive-thru is running at significant overtime as well. So it is a mix of things. I mean, we at the moment, we're running at levels that are in the sort of 15,000 to 18,000 per working day, that sort of number. And I think this time a year ago, we were running at 10,000. For a good chunk of the last 6 months, we were running at similar kinds of numbers as to what we are now between waves of infection. So yes, the numbers were -- we would, I think at our peak, we were doing something like 65,000 a day in December, but it's a relatively short period of time that you're doing that for. Most of the 6 months, you're running at that sort of lower number or at least for good parts of it, you're running at that lower number. And then it comes in periods of running at super high numbers. So I don't know whether that answers your question.

I'll take that all on board. Last question. So the CapEx has stepped up -- or the inorganic CapEx has stepped up from, what, $60-odd million last year to comfortably over $100 million this year. What should we be thinking about over the next 2 or 3 years given the digitization program, et cetera, continuing? Will it stay at that sort of higher level?

Yes. Look, I think so. We've -- that running out -- I mean, I think the -- our latest forecast on and the digitization and the LIS program are pleasingly coming in the forecast, they're coming lower. So I think we had talked about it coming in below the $90 million, and we are comfortable that it is going to come in much lower than that. So we are targeting -- don't take this number as glass full at this point, but it is more around that sort of $65 million mark in total, right? So if you said we spent $20 million before in '21, up to $21 million, '22, about $15 million in total on that program. And then another $20 million, $27 million for FY '23, that gets you to sort of a total number for that program. So that's the major component of the CapEx. Now as I said, we have shifted quite a lot of the lease arrangements in Imaging to buy for both existing and new. We will look at that in this next 6 months again, as we go through and looking for better leasing rates on some of our equipment. So that -- I don't expect that to continue for Imaging at that higher CapEx level.

Your next question comes from David Stanton with Jefferies.

Just two for me. You talked to a base business increase in revenue terms in Pathology of about 3%. When -- and I know it's difficult, but when COVID finally ends and people go back to requiring more pathology and doing -- and having more operations and procedures, could you talk to what you think the -- at least the near-term increase in what you see as revenue upside from base business testing going forward? Like should we be thinking over the medium term that it goes from 3% that you've seen to, say, 5%, 6% in terms of base business pathology increase?

Yes.

Yes. Look, I mean, I'd get my crystal ball out now. Look, what we see in between, and we monitor this sort of certainly on a -- and you might have seen them on Medicare stats, et cetera. But when the waves of COVID disappear, pathology growth on the MBS rebounds back to sort of 5%, 6% and 7% and those in-between months that it's there. So there clearly is growth that's sitting there that's a backlog in terms of where it goes. So thinking that the pathology goes back at least for a year or 2 at sort of 5% or thereabouts is, I think, perfectly reasonable based on what we've seen from the way the sort of growth comes and goes with COVID lockdowns and then recovery in between.

When you look at some of the areas in Pathology, which are definitely lower, and you know there were lockdown-related or lower community activity-related. So if you took that as -- and you've seen the MBS stats of where they are being lower, that absolutely should be rebounding. And then you add that to our growth and what we're getting on the commercial and specialist side, we would certainly be expecting that kind of growth that Malcolm is talking about.

And then a two-parter for me to finish with. MRIs for 2022, there have been -- you've been low in the first half. Should we be thinking anything major into the second half? First part.

That's right.

And then second part, I guess, nonrecurring items.

Sorry. What was the first part?

We were just...

Underlying.

Just underlying. Yes.

Okay. You're talking about NOL. Yes. So okay. So look, yes, look, this is a pretty conscious effort to try and get that as low as we possibly can. And you'll see we've taken the position of putting what we had in nonunderlying for Imaging into the underlying results. And so look, it's -- the main item, obviously, is the digital OpEx expenditure for the second half, that will be part of that. And look, I don't see it as being materially up on the first half but probably continuing at that level for the near term.

And then on that basis, tax rate for F '22, any guidance on that, please?

30%.

Your next question comes from Chris Cooper with Goldman Sachs.

Just one on labor costs, if you don't mind. I mean I appreciate how you've grown quite some way below sales growth, but it's still up 19% in the period. I'm just really interested, I guess, in how much flex you have in the current market. There's all sort of debate around the labor market currently, of course. I'm just kind of trying to have a think forward about how we sort of predict or forecast COVID volumes and the interplay of the recovery in the base business. And I'm just curious to hear the scope to which you have the ability to move labor up and down to match what is still going to be a very volatile period on the volume side.

Yes. Okay. Great question. Look, in that first half number, there were a number of EBAs, which were locked away, and we're happy that they've been locked away and now we're locked away at very attractive rates, but the rest of the increase is wholly explained by the COVID increase in casual labor. And look, we've shown obviously we can scale up labor. That labor is of a casual basis, overtime through -- and obviously, overnight labor. And we will, if COVID -- depending on where COVID goes, that we've basically run scenarios around, okay, what does our labor need to be at these various levels, and that's what we will be continuing to do as we get the inevitable ups and downs in COVID.

Okay. So there's no scenario here, Maxine, where labor cost is going to be more sticky than COVID volumes? If COVID volume is far quicker than you expect, then you'll be able to at least match that by taking labor out as quickly.

Yes, yes. And look, we've moved some labor across from other areas in the lab and as those -- areas in microbiology specifically, and as those areas rebound for normal testing, then with that, labor will shift back into that area. And that's the casual labor which will come out.

And just one other please, on the procurement wins. You mentioned at the start, you had several good wins there, but these are kind of being masked by the growth that we saw in the consumable costs associated with COVID. Could you just give us a bit more color on what and how you've delivered these procurement wins? What the lines? And can you give us some sense of materiality?

Yes. I mean, look, just to give you a little bit of color on the COVID consumables because I think it's an astronomical number in terms of -- our overall increase, just volume-related, was something like $120 million, right? So -- and then we took out some substantial savings out of that, but still, we're still ahead, obviously, given where volume was. Look, how we have done it? We've actually changed whole sourcing structure in the group. We certainly in the past, like everyone else, look for price discounts, but what we are doing, I think, much better now is actually managing the contracts and managing actually to those contracts. And that has been a material change in the way we're sourcing. And look, that's probably been one of the best outcomes at the SIP program to date, has been those savings that we've achieved.

Your next question comes from Craig Wong-Pan with RBC.

Just in Pathology, could you help us understand how large or significant that commercial segment is? And then we think growth that's been achieved there, has that been like a recovery across the whole industry? Or is that sort of specific things that you've done to get to that good growth?

Look, we don't split out our commercial and specialist segment, but they are as a result of specific tenders and specific wins, that growth. So yes, that's probably all I'm comfortable to say on the call at this point.

Okay. And then in Imaging, the market performance, you mentioned, in Victoria and Queensland was above the industry. But if we excluded the Axis Radiology acquisition, could you talk about the performance you've done on an organic basis?

Yes. So that's more in line with market. Victoria has obviously done substantially better than market and Western Australia as well and New South Wales. Look, when we take out, it's actually only 4 sites, but 4 large sites in the Southwest of Sydney, which as Malcolm said, were down 25%. That's on market as well. So yes.

Okay. And then just my last question. The cash collection got impacted by the high volumes. Was there a slowdown in the payments by the government for those COVID tests? Or is that just a sheer volume of tests that were being done in that in the last wave?

Look, it's mainly the 2 weeks in the Omicron surge. There was a tiny proportion in -- like 2 percentage points in outstanding DSO on New South Wales Health, but it was minor in comparison to the 2 weeks.

Your next question comes from Sean Laaman with Morgan Stanley.

Just to clarify on the trajectory of collections and the rationalization, I think you said at the beginning of the SIP process, there was roughly, I think it was 100 centers and -- to be rationalized. I think a year ago, there was about 2,089. Today, you're saying there's 2,027 to date. But I checked in the full year report, it says 2,010. So is that skip backup from what was reported at the full year associated with Agilex, for example?

It's got nothing to do with Agilex. There are a couple of labs in there, and I think there's basically 17 new sites. It's not -- to be clear, this is not a rationalization program overall, it's a network optimization program. In the first instance, it was rationalizing those that we thought were unprofitable and where we could collect the work in our existing network. But we don't -- we're not focused on -- I mean, I know it's obviously helpful for you to understand the numbers, but what we're trying to do is actually get to a network which we think is going to give us the biggest -- best yield. So look, it may be that collection centers go up, there might be areas where they come down, but the number is not important from our perspective.

Right. So sort of forget about 100 for now as a sort of macro or a measure of cadence?

Yes. Look, I think so. I mean I think we worked -- I think when we were talking about that, we were highlighting what we thought the tail of sites that were underperforming, and we continue to review each site and each area and make a decision around what's the right strategy.

Great. Great. And is there anything you can share on rents is the second question? And very lastly, just you mentioned the implementation or the rolling out of e-referrals, is that sort of a catch-up with other programs that might be offered by other providers? Is it a differentiator? And does it lead to less leakage of referrals and/or testing?

Yes. Thanks, Sean. Look, on the e-referrals, yes, look, as a Pathology business, I think we probably haven't done that as much as others, but it's coming pretty quickly now. So yes, look, there is a level of catch-up from that perspective. I think we've -- part of those, the digital enhancements that I talked about before will deliver, we believe, some additional benefits on top of traditionally e-referrals. It's not just about data entry, but it's about sort of accessing those referrals and the significant number of people who get a referral and then don't present with that referral to anywhere, to any pathology provider. So there are some ways. We're working on some really exciting things around being able to do that. We think that -- and I know other providers think this as well, that there are a significant number of people who get referrals for pathology who never actioned those referrals. And it's around how we encourage those people to participate. So yes, look, I think it's potentially a real growth area for Pathology more generally, but specifically for us with some of the applications that we hope to bring online over the next year or 2.

Yes, and improve that leakage in the [ parts where ] we've seen.

And the Pathology rent?

Yes. Pathology rents, look, it's always difficult to say much about this because there's always competitors on the line. So you're kind of where you go to with this. I mean there are markets that are potentially where competition is likely to increase. I think Queensland is possibly one of those. I think in terms of where it goes, there are some markets that are pretty stable in terms of where they are. It varies around the country, depending on where you go. Thanks, Sean.

Your next question comes from Saul Hadassin with Barrenjoey.

Now just a question about some comments you made regarding another potential variant emerging with COVID. At a national level across all providers, infrastructure clearly couldn't cope in late December. And you mentioned there were learnings that you have taken away, but I'm trying to work out, if there was a surge of similar nature, why would the infrastructure be any better-placed? How much of it here was just the lack of access to labor at the time? And wouldn't that just be a similar issue if people were furloughed, et cetera? What -- can you tell us what those learnings were? And why infrastructure would be in a better position, say, come winter, if we had a similar presentation of a more virulent strain?

Yes. Good question. So look, right at this point in time, I guess the point of my comments were that I don't think we would be any better-placed to deal with it. And I think if we went down that route, exactly the same thing would happen again. And we as a single provider, or any other pathology provider for that matter, can't solve this problem on their own. It's largely a state-based phenomenon. And to my way of thinking, we -- we're sitting here thinking it's all gone away. That was the comment around wishful thinking. And look, maybe that's right, but the science doesn't really support that. And if we were into risk management and planning, we would be looking on a state-by-state basis as to what we need to do to testing, tracking, tracing, isolation systems that in the event of that occurring, which, as I said, the science says is quite likely, what we need to have on a state-by-state basis in terms of where that goes and engaging with industry, engaging with everybody around how we as a health system does that. Without that, we just sleepwalk into another chaotic event like we did over December, January. And I think to some extent, that's what that's calling for, to kind of -- we've got this window of opportunity. We are working at improving our efficiency and increasing our capacity, but we can't solve the problem for the whole country on our own. That's the reality of it.

Your next question comes from Steve Wheen with Jarden.

I just had a question with regards to the quarterly run rates that you achieved during the half. So when you disclosed your first quarter, it was a particularly profitable quarter. And then as we go to second quarter and just sort of back out that first quarter number, it looks like the profitability declines quite considerably, somewhere in the order of 200 basis points. I know there'll be lots of moving parts in there, but I'm just sort of wondering if you could help me reconcile what the efficiencies were -- what efficiencies were lost in second quarter given that there was so much more high-margin PCR testing during that quarter?

Yes. Thanks for that. Look, there's probably a couple of factors. One is that you are seeing a bit of a scale effect, right, between Q1 and Q2. Q1 revenue is high. And in Q2, what happened in December was that base business did decline quite dramatically as Omicron hit. So it's really a function of those 2 factors.

Understood. And so then going into the next half, you would expect that inefficiency around the base business that then starts to correct coming into the second half, is that right?

Yes. So -- and look, our daily trading is looking very favorable. And so we obviously need that base business to be trading at more normal levels to get those kind of margin levels.

But it wouldn't necessarily -- the base business improvement as you're going into the second half wouldn't be enough to necessarily offset what you're losing in PCR profitability? Would that be fair?

Look, PCR profitability -- PCR testing is actually pretty stable. I think you've got to look at historically what our margins were when we're at the same level of PCR testing, which is what we are is more of where we were for the last couple of years. And you've got 2 factors there. One is, yes, you have a slightly lower fee, but we've also got consumables costs. So -- and we, as Malcolm said, we are investing in some additional equipment in labs, which is more broadly used in the labs, but could also be used to improve the efficiency of our COVID throughput. So look, not necessarily. I wouldn't say necessarily. Look, it's pretty hard to predict what's going to happen over the next period, but I hope that gives you a little bit more color.

Your next question comes from Rod Sleath with Rimor Equity Research.

A lot has already been asked and answered. I was just wondering if I could come back to the laboratory information system or the laboratory information system upgrade. And I was just wondering if you could possibly give perhaps a little more detailed update on what stage that project is at. Has it been fully scoped? When do you expect to start rolling out modules? That sort of thing. I'd add a couple of other questions after that, if that's okay.

Yes. So yes, we have -- the project is scoped at this point. We have a plan moving forward in terms of where that is. And we're in the process of starting to move towards implementation during the sort of second half of this financial year. So -- and look, we think that, that project, it is a modular approach to it. And we think that, that project is around 2 years from there, and it may take a little longer than that, but it's that sort of time frame.

And so I highlighted before just the 5 modules, right? So the referrals -- so the referrals and collections, so that's 2 out of the 5 modules which are built and being rolled out now. The other part which is the testing and the lab instrumentation is being rolled out in our first lab in Q2. So in the next few months. So that will be the first lab for that module, and then we will follow on subsequent labs. And then the remaining modules are the billing modules. So it's going to be a progressive rollout.

I mean it started a couple of years ago, but at the time, you were concerned about the capacity on the databases that you are operating and that database technology was a few decades old is my understanding. And then there was a fix that was found, so something that you weren't so concerned about that capacity. Is part of this project completely replacing the back end and the databases that are being used? And has that happened? Is that like a precursor that has to happen before the project carries on? Or is that something that happened sort of in line with other things?

No. So there's been a lot of work that's focusing on the back-end infrastructure, and the database capacity issue has been dealt with.

Okay. With regards to the serum work area upgrade, am I right that there's only a small part of that, that was sort of left to be completed in this latest financial period so on the whole, the benefits of the serum work area upgrade are already flowing through the P&L?

Yes. That's correct. We've basically finished that. Now in this last half, we've largely completed that. So from here on in, there's nothing left.

Yes. But you're already having the majority of the benefit, if you like, already coming through in the previous half. So the last half was just a finish off of certain facilities?

Yes. Look, as we rolled through the last couple of locations during that half, so that those benefits were there for part of the half. But yes, look, from here on in, all the benefits of that serum work area are in.

So you mentioned with regard to pathology imaging equipment that there had been a reasonable amount of purchasing taking place, that you're reviewing the leasing. So I didn't quite catch that whole comment. So I just wanted to understand what your decision process is between owning and leasing equipment. Is that just purely down to the terms of the leasing? Or is there some equipment that you would prefer to own?

No. It's just an economic decision.

Okay. So if the renegotiations on leasing come out the way you expect, you'll do more leasing and less [ purchasing ]?

Correct.

Okay. Just 2 more very quickly on artificial intelligence in the diagnostics imaging, you mentioned the use of the TB detection algorithm. Obviously, we're seeing and hearing from some of your competitors that they're rolling out more and more algorithms, and it looks like that whole process is accelerating. Do you kind of have a rollout time frame, a number of different algorithms that you're looking at incorporating into your current systems?

Yes is the answer to that as we work with those same suppliers and a number of partnerships in terms of where we go with that as well. It is difficult to pick winners in this space, so we are trying to get to the position where we have the best products available as we move forward with that, but it is an area that is moving at a great rate of knots. There are some other areas in -- particularly in pathology, where we're looking at investment in that space that's not significant, but some investment in that space to look at partnering. There is interest from AI start-ups and other companies in accessing the kind of -- in imaging, the kind of volume of imaging that we have and certainly in pathology in terms of hematology and histopathology slides that we have the catalog of that, that can assist. And there's also some products that enhance reporting within sort of pathology and pathology more generally, not just in histopathology. So there are a range of products that we're looking at there and some potential co-investments in that space, so.

Okay. So in early January, we spoke to several industry contacts from a number of different industry companies. And with regard to the sample pooling, I was just a bit surprised when you said that you're sample pooling. You're sort of really only running at about 2 samples per test because we've certainly heard that in eastern states and again from multiple companies that the norm was more like 4 to 6 samples per test. And I guess, when I say eastern states, really I mean Victoria and New South Wales. And part of the big problem that happened in late December, early January was they're effectively removing sample pooling because it was no longer economically sensible or even a time saver, that the capacity was significantly reduced across the system, something like 30%. So I was just wondering if you could expand on that sort of...

Yes. Look, it's...

Your sample for testing, is that normal across the group, rather than any particular areas which were highly stressed at the time?

Yes. Look, we got -- I mean, as I said, the vast majority were done at 2 in 1. When in the Laverty business, when it got to its peak, we got to 4 in 1. Before that came for a short period of time, there were anecdotes in the industry, though, of companies pooling up 50 in 1. And I guess, look, to be perfectly honest, our microbiologists were telling us we shouldn't be doing that. And so we made a choice not to go to that kind of level of pooling. And then it's clearly 1:1 now with the positivity rate that's there. So look, I'm not sure on what basis others went to that. I don't know that, that was as widespread in the industry as you might think, but I think it did exist.

And we were pooling -- we were taking work from other states. So for example, we took work from Victoria to New South Wales, so we had tests coming in with higher positivity rates as well into Laverty. So we use the full capacity of the national network as best we could. So that played a factor in how comfortable we were with pooling given the different levels of positivity rates between the states.

Your next question comes from John Copley with E&P.

So you made some comments in the half yearly report and during today's presentation that highlight you intend to invest in more or additional PCR capacity. I'm asking whether you could tell us what that dollar figure involves in terms of investment in CapEx and OpEx, please?

Yes. Happy to do that. So look, I think the first thing to say, it's not just COVID capacity, it's capacity that can be used for other tests within the lab. So it's extraction capacity, et cetera. And we're looking at -- so we had equipment from BGI, which we are now looking to purchase. We're on a leasing arrangement with BGI. So we will be purchasing that equipment, and then investing in some additional extraction equipment. So look, we -- currently, we're looking at a CapEx of around $8 million, which is in that $65 million and over $40 million for Pathology for the second half. And then there'll be some OpEx we spend in terms of just some fit-out as well.

Okay. So I mean just quickly, that would then imply you were doing a fair bit of your extraction manually prior to this. Is that right?

No.

So therefore, this should -- No? Okay.

Right.

No, no. It's just the kind of volume capacity of those extraction machines and the number of people it takes to operate them and so where it is, that we have the potential to change that. And that's where the -- it's the lower head count and the higher sort of throughput that improves the efficiency.

Okay. Understood. And then just quickly as well, I mean, this capacity, can it be flexed? Because, I mean, assuming the COVID test volumes continue to fall off, I mean with those 2 schools, but to your phrase, following the science. And you're looking overseas, looking at what governments or which direction they're heading in. It seems as though the testing of asymptomatic people for COVID is ending as infection fatality rates do appear to be approaching or if not already a seasonal influenza levels. How does that make you feel about the investment in PCR testing capacity? Do you think it can be utilized elsewhere? Or do you think that potentially, you need to flex that up and down based on what COVID volumes do?

Look, probably not all of that capacity can be used elsewhere, but some of it certainly can be. And look, I think where COVID testing goes to even now with what we're seeing right at this point in that we're not doing that much in the way of screening asymptomatic people. I mean I don't know sort of the clinical histories of everybody who turns up. But the vast bulk of testing that's going on now is absolutely symptomatic people. I think that's the way it will continue. So when you get to these kinds of numbers of 15,000 to 17,000 a day, there, people with upper respiratory tract symptoms and who think they might have COVID, that's why they turn up. So -- and I don't think -- I mean, testing of symptomatic people, I don't see that falling away. I don't -- I mean I'm a doctor by background. I don't see any reason why that would actually fall away. I know everybody -- the requirements around travel and testing and various other things from a government perspective change from time to time, and that does have an impact on it. I think we're forcing people to have testing before they go to work and clearly as we were back in the Delta outbreak, then that drives very large numbers of tests. But this baseline level of testing, I think, is the level that we saw last year as being the level it kind of falls to, and it seems to sit at around that when it's spread around the country. New South Wales, we were doing -- the peak in December is something like 35,000 tests a day in New South Wales, and that's come back to 3,000, 4,000, 5,000 tests a day. But that's where it was in New South Wales through a fair chunk of the first half, too. So the numbers actually pick up -- have picked up elsewhere. And certainly WA, where we were doing a few hundred tests now is sort of 2,000 and 3,000 tests a day. So -- because you've got this background of COVID and people start to worry about it. So I don't think it falls away. I think maybe it does eventually. But I think there will always be -- COVID is not going to disappear. When we talk about it being endemic, it will be around on a pretty constant basis, and it will be dangerous to some people in the community, unvaccinated, elderly, immunocompromised, and doctors will keep looking for it, and there will be a background of COVID testing that stays.

Okay. And just around this discussion of -- I know in your latest account for this half year accounts, the line instrument equipment is higher. It's jumped up at $23.2 million plus this $3 million in prior corresponding period. Was that due to -- or was that necessary to meet the COVID testing demand in December? Or is that something that we'll see continue on into perpetuity, something we should be thinking about in future periods?

No. Yes, so look, that is the BGI equipment. And so when I talked about purchasing that equipment, that will come out of that leasing line. So that's the COVID testing.

Right. So that was expensed?

Yes.

In that period, so it won't reoccur.

No. So look, we'll have some in the second half, but it will come off.

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

Thank you, everyone. I won't hold you up any longer. So thank you for your time and attention, and we look forward to talking with you on the road show.