Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Healius Limited FY '22 Results Call. [Operator Instructions] I would now like to hand the conference over to Ms. Janet Payne, Group Executive, Corporate Affairs. Please go ahead.

Thank you very much, and good morning all. Thank you for joining our results call today. I'd like, first of all, to acknowledge the Cammeraygal people of the Eora Nation as the traditional custodians of the land on which we gather today, and pay our respects to their elders past, present and emerging. I have with me our presenters, Dr. Malcolm Parmenter, our CEO and MD; and Maxine Jaquet, our CFO and COO. We will try and keep the presentation a little tighter today, so we don't go over the allotted hour. The divisional slides are in the deck, but we are taking them as read and we will only cover the highlights today. But as always, Corporate Affairs is available to answer any detailed questions after the call. So with that, I'll hand over to Malcolm. Thank you.

Thank you, Janet. Good morning, everybody, and welcome to the Healius FY '22 Results Presentation. And thanks to all of you for joining us. I'll take you through a few key slides on the FY '22 performance, trading update, introduce you to some of our consumer innovations and some new announcements. And Max will also update you on capital management, cost control and the sustainable improvement program. As Janet mentioned, we're not going to go through the detailed divisional performances, but you can read these for yourselves, they're in the appendices. So if you turn to Slide 3 and looking at our top-level results, you can see it was a record year for the Healius Group, one in which we delivered a 22% lift in revenue, with EBIT up 85% and NPAT up over 100%. First of all, I'd like to acknowledge another huge effort from our people and say a big thank you to them for their outstanding work and the delivery of this record result. What they have accomplished this year is simply extraordinary, except they did it the year before as well. So let me highlight some of the key points that the Healius team has achieved this year. We've been able to scale up in ways we never thought possible, as you can see from these numbers. In fact, we handled 40% more episodes through our pathology laboratories in FY '22 than in the preceding 12 months, which was itself an extraordinary year. And while our share of COVID-19 testing was strong, we're also pleased with the level of non-COVID or underlying pathology revenue. Our Commercial segment grew strongly in the year, up nearly 8% as we focused on diversification and higher margin growth. In addition, our market share in underlying bulk build revenue was stable. Flexing systems up is one part of the equation. Flexing down when volumes reduce is just as important. And I'm pleased to say that our ability to flex down in the second half of the year was as impressive as the scale up was in the first half. In the second half, we achieved 29% EBITDA margins in the Pathology division, and this is the same as the FY '21 margins. It showed our ability to rapidly pull costs out of the business where we needed to. The strong second half also underscores the success of our footprint optimization initiative for our ACCs. Our focus to date has not been on the total number of approved collection centers, as we've outlined previously, nor even on total revenue. It's been about improving the returns we are getting from our network and making sure the revenue we achieve has an adequate margin. We've compared our underlying Pathology revenue and footprint to pre-pandemic levels. And most pleasingly, we have delivered nearly 11% more revenue per ACC than in FY '19. And with a higher performing network, we now look to selectively grow this footprint. Turning to the Imaging division, the well-publicized shortage of GPs in this country has impacted our imaging services at sites within the former Healius Medical Centers. This channel is unique to the Healius Imaging division and affects the comparability of our results. Despite that, our financial performance in Imaging was ahead of the market. And that's in spite of the fact that through most of FY '22, Imaging was justled by a number of well-documented factors, including COVID impacts, such as restrictions on surgery and hospitals and the apparent reluctance of patients to access health care out of fear of contagion. Also, the extra costs associated with offering services during COVID, including staff shortages and sick leave, the difficulty in rapidly flexing frontline labor in a multi-site footprint, and the country-wide shortage of radiologists. But after a tough period earlier in the year, the Imaging division is improving with a good performance in Queensland in the second half of FY '22 and pleasing growth in FY '23, where revenue per day has been accelerating from mid-July onwards. We're very focused on growth in the next 18 months, and Lumus is well placed for the likely rebound in demand from a backlog in diagnosis and surgery with a strong hospital presence. Our previous CEO in the Imaging division, Dean Lewsam, has departed and we are well down the path of appointing a radiologist to lead the division. In the meantime, I'll be the interim Imaging CEO as we continue the sustainable improvement program, the rollout of our digital applications, and we target small- to medium-sized M&A opportunities. Across the whole Healius business, we've had a huge year in terms of the delivery of the sustainable improvement program, the digital agenda, with much of it towards the end of the year. Our SIP implementation has grown from 25% at the Investor Day in May to 45% by the end of the year in terms of run rate benefits. These back-ended initiatives are not showing up in the margins in the year, but will do so in FY '23. In particular, the Healius digital program is delivering great results, but more about that later. Last, but by no means least, we have rewarded shareholders with a growing annual dividend and nearly $140 million given back in 2 share buyback programs in the financial year. So if you move on to Slide 4 and our trading update. Now we're not providing guidance at this stage given the unpredictability of COVID and its impact on the return of regular testing in health care. But our growth for July and August against last year is also not particularly informative as it reflects the timing of lockdowns and the strength or weakness of the prior period results as much as the current results. In terms of trends, if you look at where we've been trading this financial year, Imaging is showing encouraging signs of improvement, as I mentioned before. BAU Pathology is also coming back while COVID seems to have settled at around 10,000 to 12,000 per working day over the last 2 months. Now it's impossible to say where COVID testing will eventually end up, but it will continue for the foreseeable future. And although COVID has fallen out of the headlines in recent times, its clinical implications remain a concern for doctors, especially for their vulnerable patients. This concern will drive PCR testing forward, which is likely to range for us between 7,000 and 14,000 per working day, which is over and above our regular testing as novel variants come and go. In terms of a bounce back in non-COVID testing, the prevalence of COVID and other respiratory viruses has resulted in some delay. However, the underlying drivers are still strong, and growth is expected to revert to the long-term trend. There'll also be a period of catch-up for the known and worrying levels of under diagnosis in the system over the past 3 years. Now if we move on to Slide 5 and turning to some interesting developments in the specialty and higher-margin sectors of our business. As you're aware, genomics and vet pathology are growth areas we are targeting. Today, we are announcing an exciting partnership with a U.S. company, C2N Diagnostics, which is a leading global provider of brain health laboratory services. We will soon be offering their high-quality blood test for cognitive impairment. It's a test for a protein that when excluded largely eliminates Alzheimer's as a potential diagnosis. This can provide timely diagnosis for Australians with memory or other cognitive problems and help in the evaluation of Alzheimer's disease. In the high-margin pathology space, as you're aware, we've also moved into clinical trials, an area most leading pathology providers around the world operate in. Clinical trials pathology is proving to be a good market with strong long-term tailwinds. We've seen that in the growth of Agilex with a year-on-year revenues up 52% and their pipeline up 80%. Our current focus is investing in and growing Agilex's Australian operations, and we expect it to be a growth channel for us going forward. In the Imaging space, Lumus Imaging has won another substantial hospital contract, with this contract covering the Hunter New England Local Hospital District (sic) [ Hunter New England Local Health District ]. The contract is to provide reporting along with some on-site services for 32 hospitals across this region, including Tamworth, Armidale and Moree. Together with our Northern New South Wales contract, which we already had, Lumus Imaging now provides reporting services for almost all public hospitals in New South Wales, north of Newcastle. This contract will run for at least 3 years and will be a good addition to Lumus' bottom line this year. On the AI front, we have applied AI-assisted reporting to around 300,000 chest x-rays using Qure AI technology as part of the immigration contract we have through BUPA. Qure AI has proved a useful support tool helping improve the radiologist efficiency and confidence as a secondary capture tool. And we're now working with Sydney Uni to assess the practical implications of this program. Now on to Slide 6 and customer services. So it's our aim to permanently change for the better the way consumers interact with us as a health care provider. This is becoming important for competitive differentiation, and I believe consumers will increasingly vote with their feet towards providers who can offer not only clinical quality, but a great experience. I know most of you probably don't want to hear much about COVID these days. But for us, the pandemic has proved the old adage of not wasting a crisis as Healius led the way with a number of COVID digital innovations. We were the first to market in Australia with a commercial travel COVID testing solution, helping consumers navigate the ever-changing landscape of COVID travel testing. We were rewarded for this with a more than 40% share of this market. We're also first with paperless COVID drive-through testing, increasing convenience and reducing the risk of both COVID transmission errors and human errors. We had our digital solution out within a week of the delta surge in Southwest Sydney and out to all New South Wales COVID testing sites within the month. During this year, we've also introduced a range of key consumer innovations in business-as-usual operations. These include e-referrals for both pathology and imaging, a digital collections portal and a multichannel voice of customer program across our network. In the year, we've enabled 1,835 collection centers for online connectivity and trained 800 collectors in the use of those new digital tools. In Imaging, we have enabled 122 imaging centers to use our electronic booking system and we've trained 345 clerical staff in its use. And we have onboarded numerous referring medical practices. We've also deployed a voice of customer program across more than 2,000 pathology sites this year with feedback embedded into management performance metrics. This will support a rapid cycle of continuous improvement on customer experience across our entire network. We're moving at pace with a lot more exciting innovations in the pipeline for FY '23. On to Slide 7 and sustainability. This has been a focus over the last 18 months or so, and we have set our sustainability aspirations and identified our 5 immediate priorities from the vast array of matters that sit in the sustainability ecosystem. The S of ESG, including our people and our customers is central to our success as an organization. As a service company, our success is underpinned by our ability to attract and retain the right talent, putting our people front and center with the right tools and support to deliver the best possible outcomes. Our sustainability strategy is aligned with our internal people strategy. This aims to create a strong, collaborative, performance-driven culture with a clear sense of belonging. And we're looking to enhance employee recognition and benefits to improve training and career pathways and to foster diversity and inclusion. To this end, we've signed up to both the HESTA 40:40 Vision and the Minderoo Foundation's Generation One Indigenous Employment Index. For our customers, both referrers and patients, you will continue to hear about all our exciting initiatives under the Healius digital program. Turning to the E space. We have baselined our Scope 1 and 2 emissions over the last 2 years with FY '22 at 32,000 tons of carbon equivalent emissions. And we aim to be carbon neutral by FY '26, with 75% of the program identified. And I'm sure further reductions will be identified as electric cars and an array of green initiatives become more readily available and more cost effective in Australia. Ethical sourcing is also a key priority where we have an ongoing review of our supply chain, especially within known risk areas such as PPE manufacturers. To ensure we embed sustainability into the group, we have set up the necessary governance structures with a dedicated sustainability committee reporting to the Healius Board and sustainability KPIs within our remuneration framework. Now our sustainability report will be out in September very shortly, along with our annual report. Now at this point, let me hand over to Max, who will talk more about our balance sheet, our capital management, more about our sustainable improvement program and digital initiatives. Thank you, Max.

Good morning, everyone, and thank you, Malcolm. First up, I wanted to call out that this year has demonstrated the benefits of having a simplified portfolio that generates significant cash. We're pleased to announce record gross cash flow of $677 million and free cash flow of over $530 million, of which 45% was returned to shareholders. This has also meant that we can invest in digital, greenfields and equipment to underpin sustained growth. Along with investing in growth, we intend to maintain a conservative balance sheet and remain committed to our target gearing ratio of 1.7 to 2.2x. We're also creating space for medium-sized bolt-on acquisitions in Imaging, where we see these types of deals as value accretive. And on the topic of transactions, we're pleased with the response to date for the sale of the Montserrat business. Turning to cost management. Another key call out for the year has been our management of the cost base. As you can see, there's obvious leverage in our business but we've done more than that. Despite pathology volumes being 40% higher this year, the pathology FTE count was flat. As Malcolm said, equally important is our ability to flex down as COVID volumes normalize through the year. This resulted in second half margins the same as last year. A lot of what we're doing in SIP is allowing us to more closely manage labor to demand. The other call out is our performance in managing consumables. Market price increases were offset by our sourcing and procurement initiatives despite stopping pooling in December in response to COVID positivity rates. We were able to reduce consumable spend as a proportion of revenue. And looking forward into FY '23, we're continuing to manage inflation of our input costs. In terms of consumables, our SIP program is improving both sourcing and demand management to continue to offset any price increases. In terms of labor, most of our staff are on enterprise agreements and most of these agreements are not being renewed until FY '24 and FY '25. But we're a people business and look forward to continuing to manage our labor costs with our staff. Turning to SIP Phase 2. Our Phase 2 of our SIP program continues to deliver revenue and cost initiatives to expand our margins in Pathology and Imaging. Since the Investor Day in May, we have been able to accelerate some initiatives that were previously on hold due to COVID working conditions. This has meant that we've completed $30 million worth of the initiatives representing 45% of the original target value. We've made progress on various initiatives, including ACC network optimization, back office and lab process reengineering, tools to be better able to manage labor to demand and procurement. In FY '23, much of the benefit profile will be underpinned by the digital work that is underway. And our implementation costs for the program continue to track lower than originally forecast. We remain on track to exit FY '23 at the target margin, assuming the recovery in BAU volumes in the second half of the year. Turning to digital. The execution in digital has been a real success story for the year. As previously discussed, our digital agenda has 2 types of work: digitization of customer-facing workflows and cutover of lab instruments. I'm not going to go into the detail of the customer-facing workflows other than to say these are products and services that we will continue to bring to the market rapidly. Malcolm has already gone to some of the innovations here. The second part of our agenda is the steady pace cutover of lab instruments. We have progressed with our integration of the new instrument manager to our lab systems. This has involved cutting over a regional lab first and running the old and new systems in parallel to ensure operational integrity as we go through this process across the rest of the network. We're now configuring the first of 4 major labs to the new instrument manager. This will make it easier for our clinical staff to manage ongoing changes to analyzers and also to increase automated validation of test results. You can see what else is coming up in the agenda in FY '23. And again, we are confident we can continue to manage within our cost envelope. Turning to growth. Underpinning this performance improvement is a capability build in both digital and commercial. This will allow us to grow beyond the market and importantly, deliver double-digit ROIC. As we said at the Investor Day, we're a diagnostics business, and we see growth in both Pathology and Imaging businesses. In particular, there are opportunities to grow our ACC network now that it is more profitable and also to grow our national imaging footprint. We see this growth being realized through a combination of greenfields, contract wins and bolt-on acquisitions. Clinical domains will be a focus for us as Healius now has a set of capabilities in diagnostic insights and bioanalysis that spans R&D, to screening and diagnostics, to therapy. We are focusing on the highest burden disease groups, including cancer, cardiovascular disease, musculoskeletal disease, mental health and metabolic conditions. Specialty pathology areas promise double-digit revenue growth as do innovations in imaging modalities and technology. We will build, buy and partner as appropriate to realize the growth from these clinical domains. We are currently making investments in time and modest amounts of capital to pursue these opportunities. In terms of acquisitive growth, we've got a good track record here. Even in the challenging market for Imaging this year, the Axis Diagnostics acquisition has outperformed for us. A lot of recent work on shaping the portfolio and margin improvement is setting up a platform for growth. This platform is simpler, leaner and offers more optionality than what we had previously. I'll hand back to Malcolm now who will conclude the presentation by describing how this has fundamentally improved the overall business over the last 3 years. Thanks.

Thanks, Max. So Slide 13. And I'd like to finish with a snapshot of where Healius stands today compared with FY '19. And this is to reinforce the achievements that we've made over and above the delivery of 13 million COVID-19 tests. As a company, Healius is in a far better position than it was in FY '19 with a much simpler portfolio having divested medical centers in IVF. Our return on invested capital has grown. And through our SIP program, our margins are expanding to competitive levels. We have far less capital intensity in our business with greater free cash flow, producing a fortified balance sheet and strong shareholder returns. With this strength, we will deliver growth in our diagnostics businesses realized through personalized insights and superior customer experience. We have a broader range of growth options now than in FY '19, including exciting innovations in genomics, specialty pathology, precision medicine, clinical trials and AI. Our growth thesis is supported by, firstly, the increasing importance of screening and diagnosis in reducing downstream health care costs. Also by the convergence of pathology and radiology in the diagnosis and treatment of disease and by the growing consumer choice in health care. Our capital allocation, our group-wide sustainable improvement program and our Healius digital programs demonstrate our commitment to long-term sustainable growth in the diagnostics sector. Finally, on Slide 14. We've highlighted the achievements in the year. I'll let you read them yourself, but our team has delivered outstanding performance across all operating metrics this year and executed on key initiatives in order to position us for growth in FY '23 and beyond. So thank you, everyone, for listening, and I'll hand back to the moderator for questions.

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

Perhaps if we could start with the SIP program. So just to make sure I understand it and I know we're not getting guidance elsewhere, but just to understand the savings. So $30 million has been delivered, $67 million is the target exit rate. So that would imply sort of closer to $50 million of savings coming through in the current financial year. Is that the right way to think about it?

Yes. In terms of in-year savings, that would be -- that's a fair assessment, David.

Okay, great. And if we think through margins, and I'm going to focus on the Pathology division given it's dominance. So you've come out of the second half with margins back where they were in FY '21, but still presumably boosted by COVID testing. If let's assume we see a return to BAU, I mean, how should we think about margins as COVID testing contribution eases off but cost savings come through? All other things being equal, can this margin be maintained?

Look, it's a great question. And the answer is it depends on what overall volumes are, right? So it depends where BAU volumes sit and COVID volumes. So if we assumed that we had BAU volumes returning to a normal growth level and we'd set for us an overall growth target, you will see from those 2019 uplift, and we haven't had that growth in the last few years. But look, it depends on where growth gets to in BAU in that second half and COVID testing. So if we said COVID testing hovers somewhere between 5,000 to 10,000 tests on average for the year and then we get a normal recovery in BAU, we will definitely see margin sitting at that 13% to 14%.

Okay. That's an EBIT margin.

Margin. Correct.

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

Can you speak a little bit about the base business? You're saying that you're seeing some encouraging growth early in this financial year. Can you give us an indication of which geographies might be doing better, which of your segments might be performing better than others?

Yes. Thanks, Lyanne. Look, we've seen base business continue that trend of moving inversely to COVID numbers in the community, and to a large extent to how much COVID is actually in the news in terms of where base business sits. So with COVID numbers being higher in early July, non-COVID revenue was lower across all of our divisions and then recovering and now reasonably strongly into August as it sort of disappears from the media headlines. And look, I think it -- I think the fear of COVID is probably gradually diminishing. And I think part of that base business or the drivers for that base business -- one of the negatives there has been the reluctance of people, particularly people who consider themselves vulnerable to access health care and to delay things that they consider to be elective. So it's that kind of swings and roundabouts. It's hard to know exactly where COVID goes. Within our -- the numbers of COVID tests that we're doing at the moment, our positivity rate there is still about 12% to 15% of COVID tests that we're doing in our labs. So despite the fact that it's largely disappeared from the commentary, albeit talking about reducing restrictions further, but otherwise disappeared from the commentary, there's still quite a bit of COVID around. And so -- but despite that, we're seeing that business as usual, that the non-COVID revenues start to recover.

Okay. And if we could touch on Imaging just a little bit there. You also mentioned that growth in July and August was encouraging. Can you provide a bit of color? And are you seeing, I guess, the Imaging mix return to, I guess, more normal levels rather than focus on higher modality imaging?

Yes. Look, yes, we're seeing both of those things. So volumes coming up and average fee increasing into August as more of the higher modality procedures are requested and ordered. We've also, over that period of time, been progressively rolling out our e-referral system, which is driving some more volume into that. And we expect that trend to continue across that Imaging business as we do that.

Your next question comes from Andrew Goodsall from MST Marquee.

Just starting with Agilex. Just trying to understand, it was up 30% on the 5 months under your ownership, for the full year up 52%. Should I read that as a slowing? And then just any color you can give on what was happening at the EBIT as well?

I think that's really only just on a larger base, Andrew, is where that changes. Yes, it's a relatively small business that's growing quite quickly. So I don't think the trend on growth has slowed at all or changed from where it is. And the pipeline is still very strong.

Okay. So just over half-on-half comparables?

Yes.

And in terms of EBIT there, just was it in line with where you would have expected? I think at the time of the acquisition, EBITDA of $14 million to $16 million was the number given?

Yes, $14 million to $16 million, and that was a calendar year number. So look, we are still expecting the EBIT numbers to come through in this -- in the FY '23 year. There's definitely been some equipment delays and a couple of reagent delays as well in terms of getting that volume. So the pipeline is incredibly strong and the revenue is incredibly strong. And for us, the challenge is how do we deliver against that demand. So still very confident in both the margins and also the growth in the business.

And just going back to trading more generally, and the margins that you've talked about. I'm just trying to get a feel for where you exited the year in that Q4. It seems if we look at the test rates per day now and I guess, in February to April, you said they were sort of around 15,000 tests per day. Just what that meant in terms of those margins? Did it move them towards the Pathology margins that you gave in your -- not guidance, but your indicative margin, Maxine?

Yes. Look, the June EBIT numbers were actually pretty strong. You'll all see the difference between the May and the June numbers, so -- and the final number, sorry, to get to the June EBIT numbers for Pathology. So they are probably a bit higher than what I'm foreshadowing. Look, it really comes down to -- we're very confident on the cost savings. And the variables which are unknown, what is the rate of BAU recovery and what is the level of COVID. So that is hard to forecast. And so when we talk about normal BAU, if we have a normal BAU trading in that second half of this financial year and we either have that or we have slightly lower trading and we have a level of COVID testing, then we'll see margins probably sitting above 14%. It just depends on where those 2 variables go. Because in BAU testing, there's also -- it's also a function of mix, which obviously goes to fee. So that has a fairly material swing factor in terms of bottom line impact.

Perfect. And final one for me, just on M&A capacity. Obviously, you've got a sale process underway, which is going to catch you up more. What's your sort of appetite for where you might take your debt levels after that? Would you be happy to sort of have the balance sheet really working?

Look, I think we -- until we -- look, we -- well, it depends what we get in terms of the sale proceeds. I mean, we have a sort of a target. We would like to redeploy that capital into Imaging. We do see a pipeline of accretive acquisitions, which we think will bolster both our mix and our network coverage in Imaging. So that's where we'd like to deploy that capital. But we -- look, we are sticking to those gearing ratios at this point in time because we think that's prudent.

The current ratios or...

Target. We said 1.7 to 2.2x.

Your next question comes from David Bailey from Macquarie.

Maxine, you kind of hit on one of my questions around that the implied month of June, it looks like about $19 million of EBIT for that month. Just wanted to confirm your commentary is sort of push adding a bit of a step down from that level under that sort of BAU plus COVID testing scenario?

Look, I think it was a fairly what we'd expect to see for FY '23 in terms of normal trading. So it's not a bad base to use for the FY '23 months. But there's a lot to be played out yet in the year.

And just confirming the earlier commentary that there's incremental benefit of about $50 million under SIP?

That's right. Yes.

Yes. And then for fiscal '24, so the digital initiatives, the spend on track and just confirming that [ 16 to 26 ] outside the SIP over and above [indiscernible]...

Yes. So look, that's exactly right. So we talked about benefits from having a consolidated network of labs at that period of time and also not running dual systems. So right now we're obviously carrying the cost of running Ultra and the new set of systems so that, that comes at a cost, so we won't have that. And then we also think there are some optimizations that we can make on a small number of tests across the labs. And so that's what forms that benefit. But obviously, you need to get to the end of the program to deliver those benefits, as we've said previously.