Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Healius Limited FY '23 results. [Operator Instructions] I would now like to hand the conference over to Ms. Janet Payne, Group Executive Corporate Affairs. Please go ahead.

Hello, and welcome, everybody, to the Healius FY 2023 Results Presentation. I will hand you straight over to Maxine Jaquet, CEO and Managing Director, to kick off the presentation.

Thank you, everyone, for joining us today. Before we get into the presentation, there are three messages I wanted to convey to set the scene. First, it's been a big year for Healius, and it's been one characterized by reset. Specifically, resetting our leadership team, resetting our culture and resetting our cost base to position for growth. Secondly, we have a plan for our earnings growth, and we are executing it with focus, and it's already delivering value. And finally, we are optimistic about the year ahead, both in terms of market fundamentals and our positioning to realize market growth. I will kick us off with an overview of the results this year. That includes what we've achieved in the last 12 months as well as our priorities for the next year. We also have Jan van Rooyen, our new Head of Pathology and Dr. Phil Lucas, Head of Imaging, who will both speak to their respective areas. And our group CFO, Paul Anderson, will then take you through the financials in more detail. After that, we've left some time for Q&A, as we usually do. The underlying EBIT for FY '23 is $99 million, which is in line with guidance. This reflects group revenue growth of 6% for the year at $1.6 billion and the drop-off of COVID PCR testing in pathology. The cost reset and performance improvement we described at the first half results have come through in the year-end result. H1 to H2 saw a 240 bps margin improvement. A leading driver of this is labor productivity. We are focused on the operating leverage of the diagnostics businesses to increase both Pathology and Imaging labor productivity by 8% and 9%, respectively. Cash conversion was strong, and gearing is within covenant. Reported earnings includes an impairment charge in the Pathology division, which Paul will explain shortly. We also have made some material steps in our sustainability plan, such as continuing to reduce our Scope 1 and 2 emissions and developing our green energy contracts, which will be cost neutral. The theme of reset is clear in these numbers as we come out of an extraordinary period of COVID. And now looking ahead, there are 4 main goals for the group. First, we need to participate in the market recovery and then sum. It is our goal to better leverage our well-established brands and clinical capabilities to grow above market in targeted customer segments. Secondly, the leadership and operating culture is changing for the better. There's a new level of expectation for leaders and managers and the front line. We are more competitive, customer-orientated and data-driven. This will always be underpinned by the highest quality clinical standards and governance. Thirdly, performance will also be dependent on maximizing the value of our fixed cost networks. We will continue to challenge ourselves to evolve our operating processes to reduce our cost base and improve our revenue mix. And finally, our capital management strategy will continue to favor organic growth with a careful management of the balance sheet to improve ROIC. In looking to Healius performance, it's worth putting this in the context of the overall market. I think by now, it's been well Canvas, the Pathology revenue has grown below the historical averages of 4% to 5%. And this has largely been driven by the slower recovery of GP services post-COVID. We continue to be confident in the structural growth drivers of Pathology and the clinical needs of the Australian population. Regardless of this temporary point in the cycle, Pathology will continue to be a critical input to the diagnosis and management of most diseases. Early screening and diagnosis is also fundamental to reducing downstream healthcare costs. This is what gives us confidence that there will be a reversion to the long-term average without trying to speculate on the exact timing or rate of growth. You can see from this page that specialist attendance has recovered faster and did not fall as much as GP attendances. The Pathology market is dependent on both these types of referrals, and it is clear that the market growth is being driven by specialists in the near term. Also worth mentioning is that specialist pathology referrals are more valuable than GP referrals, that is they attract a higher average fee for pathology services. Now looking at the diagnostic imaging market. This market looks to be reverting to the long-term trend of 6% to 7% growth. And pleasingly, Lumus Imaging outperformed the market over the last year. This market is being driven by modality mix. The 3 blue tone segments at the top of the bars are MRI, nuclear medicine, which includes PET and CT, are driving significant growth in the overall market. As you'll hear shortly from Phil, our strategy is to grow these high-end modalities via our existing community site footprint. Before that, I wanted to briefly update you on our digital program and how it is underpinning our growth objectives. There's a lot here because we wanted to be as specific as possible on what we're doing, how it creates value in the core business and what stage of build and roll out each module is up to. I won't go through everything now, but happy to answer questions on this in the Q&A. Let me for now give you some highlights. Everything we're doing in digital is an investment in growth and earnings for Pathology and Imaging. For example, the new Collections Portal helps us to better serve patients in the ACC, including how we register patients, protocol tests, collect specimens and handle payments. Another way we're providing better products and services to clinicians is through our new Results Portal. This will now provide clinicians with a great experience for viewing patient history, getting more clinical insights, requesting further tests and collaborating with other doctors. We're also doing a lot to improve core processes to extract more value from the fixed cost base. For the LIS upgrade, out of the legacy ultra system, 2 out of 5 modules have been completed. Finally, we're using digital products to run the company in a more transparent and efficient way. We have platformed 14 years of diagnostic data already, which we will be starting to use to drive better clinical insights. This data platform will also be fundamental in data-driven AI. Looking at the next wave of technology opportunities, it would be useful to address what we're doing in AI and digital pathology. There are clear clinical and productivity benefits from AI for diagnostics businesses, and we've already deployed some of these, just as the Qure AI partnership for tuberculosis screening, which underpins one of our important government contracts. We're currently working on more use cases, particularly around cancer detection across both Pathology and Imaging. Given the unprecedented growth in AI solutions worldwide, our strategy is to work with an aggregator to draw on an evolving and ever-changing suite of AI vendors rather than building in-house or partnering with few vendors whose technology may not emerge as the market leader. Digital pathology is also a promising development in targeted tissue types. And when added with AI tools has the potential to drive real benefits around speed of processing and greater clinical insight. We have the scanning infrastructure already deployed, and we are working on validation studies for 3 areas of human histopathology. I would now like to introduce 2 of our key executive appointments this last year. Dr. Jan van Rooyen, who leads Healius Pathology; and Dr. Phil Lucas, who leads Lumus Imaging. Both of these healthcare leaders bring decades of clinical and commercial experience. I'll hand over to Jan to introduce himself and the priorities for Pathology. Thanks, Jan.

Thank you, Max. Good morning, all. This is a wonderful opportunity. And I'm really thrilled to be here. Over the last couple of months, I've had the chance to look at Healius and the pathology market in Australia, and I see nothing that I've not seen before. When I think about pathology, it's a science business, a logistics business, a data Insights business and a customer service business. We're going to enhance our operations across all 4 parts. Each part is capable of optimization. To begin with, I'm laser-focused to make us the easiest possible partner to deal with. Over the medium term, I see promising opportunities to improve our clinical mix towards higher growth areas like genomics, oncology and other chronic diseases. What's more, we are at the cusp of an exciting time for service delivery. We now have new enablers for value in digital and AI. We are positioned at Healius to exploit these. We will do this through our digital agenda, which Max shared with you and the standardization of our state laboratories. All in all, it is a great time for me to be here at Healius. The cost base has been reset, and there are a lot of growth opportunities. Thank you. I'll hand over to Phil now.

Thanks, Jan. I joined Healius in January 2023, and it's been exciting to lead Lumus Imaging, a business of national scale that is regarded highly for its clinical quality. Over the last 8 months, I've had the opportunity to spend time with our 2,000 clinical and administrative staff to see that in action every day. Together, we have developed our 5-year strategic plan and building on our current above-market growth, we will be carrying on implementing this strategy. In this plan, we are aiming for new sites, larger margins and greater efficiencies, resulting in a larger and more profitable business. I'll share some of these initiatives with you today. Firstly, we are expanding our community site footprint and increasing the revenue per site to a target average of greater than $5 million. We have continued our shift to high-end modalities, adding strategically placed additional MRI units and increasing the number of PET scanners across our network. We are in for a busy year with a strong pipeline of new community and hospital sites in the coming 12 months, including a new site to open in February 2024 at the Ramsay Northern Private Hospital in Melbourne and 7 other sites across the country, including 2 new PET installations. We are also partnering with leading cardiologists to expand our cardiac imaging offering in the Eastern states. We have increased our private billing with out of pockets for targeted modalities, including MRI and ultrasound. This has been generally well accepted, and the relatively small volume drop-off has been easily offset by the increased average fees. The engagement with our radiologists has been pleasing. And I have a good understanding for the career aspirations for both our older and our younger generation radiologists. We have had 21 new radiologists joined Lumus on our new employment contracts over the last 12 months, which is an amazing result with a good pipeline of new recruits over the next year. This is a credit to our fellowship education program and the changing culture at Lumus. Finally, the technology rollout in Lumus to improve our productivity and quality continues. We will expand the use of AI in our business in the most cost-effective way, especially in screening programs and in studies that require long dwell times by radiologists to assess disease burden. This year, we'll also see us exploit the Healius digital program and commence online bookings, delivering an enhanced results portal for image viewing and introduced new radiologist workflow management systems. Thank you, and I'll now hand over to Paul.

Thanks, Phil, and good morning, everyone. So first up, our group results. As Maxine set out earlier, Core revenues for the period were up 6.3% on FY '22. Pathology was up 3.6%, and Imaging at a gross level was up 7.3% and ahead of the market. Agilex, which we bought partway through last year, accounts for $21 million of additional revenues. The comparisons are, of course, impacted by an 89% drop in COVID revenues. Our underlying costs, including D&A, finished at $1.6 billion in FY '23, which has delivered on the cost reset program as set out in the first half '23 results presentation. There were nonunderlying items of $45.1 million. We have been consistent in our treatment of these when compared to H1. The increase in H2 was due to an increase in activity in the digital spend as this program accelerates, restructuring and termination costs as we completed our cost reset program and defense costs related to the hostile ACO takeover bid of $5.4 million. There are also impairment charges in both divisions. Lumus Imaging, as we reported in the first half related to the imaging leases in our old Medical Centers. We have also booked a noncash impairment charge of $349.8 million to goodwill in the Pathology cash-generating unit. This impairment relates primarily to Agilex, lower forecast cash flows post-COVID and an increase in the weighted average cost of capital to 8.5%. Rounding off the statutory results, there was a $12.2 million profit in discontinued operations, which incorporates both in-year trading and the profit on sale of the Day Hospitals division. Now if we turn to the next slide, we've set out both halves in FY '23. And what this demonstrates is the improvement that we've made in the second half '23 following the costs reset program being finalized. As you can see, we have delivered 240 basis points of improved margins from this reset, despite a 70% drop in COVID revenues. We've removed the majority of COVID direct costs, and we've reduced our labor costs, especially pathology laboratory labor costs and group-wide support costs. With the cost reset complete, our ongoing efficiencies will continue, but as part of our business as usual. The next step change in our cost base will come from automation and digitization over time. Now this next slide expands on the cost reset slide that we've shown at the first half '23 results presentation and shows these cost buckets as a percentage of revenue. The box at the top of the slide sets out total costs for the half. As you can see, all ratios have improved in H1 apart from a minor increase in network costs, which we expected and due to selective Pathology ACC expansions and some inflationary costs. Our labor ratio is a key callout reducing to 50.2% in the second half. Encouragingly, Pathology labor for the half was circa 45%. Now for the Pathology results. Core revenues were up 3.6%. As Maxine has said, referral mix has impacted these results. Soft growth on PCP was due to constrained GP attendances, and growth here will return when the GP supply and access issues are sorted. Clearly, the Pathology results have been impacted by an 89% drop in COVID revenues. Importantly, though, second half '23 margins grew 260 basis points to 7.5%, due to the success of resetting of both COVID and BAU costs. As a result, domestic FTEs are 11% lower than PCP after an efficiency program that was led by our Pathology team. BAU labor costs were flat, despite EBA and other inflationary increases. Overall, the Pathology results show we are well placed for volume growth with our cost base now reset. A significant amount of effort has been made over the past year to rebase the Agilex business. The main takeaway from this slide is the Q4 run rate of $9 million in revenue, which is growing and always well for FY '24 financial year. The operational issues we had from the ownership transition, along with scaling up the business through appropriate staffing levels and a business development pipeline, have now been fixed. We've invested in people and laboratories, a second laboratory in Adelaide and a toxicology facility in Brisbane. Agilex is also in advanced negotiations with commercial relationships to provide a global bioanalytical offering for all 3 phases of drug asset development, leveraging the Australian advantage for preclinical and Phase I work. We remain confident in the market fundamentals of this business, the strategic rationale for the acquisition and Agilex's expertise and competitive position. As Maxine said, we have been -- we are benefiting from a very good referral mix in Lumus. Our gross revenue grew above market at 7.3% on PCP, and the community and hospital channels combined grew gross revenue by 9%. The EBIT nearly doubled due to the benefits of the cost reset program and digital initiatives as well as the leverage impact of higher volumes on a fixed cost base. As Maxine has already told you, compared to pre-COVID, we have improved efficiency, measured and exams per FTE and revenue per FTE. As Phil has mentioned, Lumus has now recruited a number of radiologists in the period, supported by the new employment model. We remain focused on increasing our revenue per clinic through upgrades and expansion to large-scale comprehensive sites and developing a greenfield and brownfield pipeline. With this focus, coupled with further capacity in the hospital channel, above-market growth is again expected in FY '24. Looking at the key points in our cash flows and capital spend. Gross operating cash flow conversion was 108% of underlying EBITDA. Maintenance CapEx remained at our historic and sustainable level of approximately $40 million. We had selective investments undertaken in growth initiatives, including digital customer and referral portals, and as part of that, LIS upgrades. The extension to our ACC network, a new toxicology laboratory and instrumentation upgrades in Agilex, along with upgrades to imaging's facilities and modalities. We believe that we are in line with global peers and our CapEx spend who are sitting at a spend of around 3% to 4.5% of revenue for a sustainable long-term model. We also received $127 million from our Day Hospitals sale. To give you some guidance on our expectations for FY '24, maintenance CapEx in the next 12 months is expected to be in the region of $40 million to $50 million, and growth CapEx, whilst we're not giving guidance on the absolute number, will be oriented towards organic growth and with a disciplined focus on returns on this incremental capital. We're looking at the range of technology spend ACCs and imaging sites, both brownfield modality expansions and greenfield sites. As we set out earlier in the presentation, we have made a noncash impairment charge of $349.8 million to goodwill. Healius carries significant goodwill on its balance sheet regarding historic acquisitions, primarily relating to Symbion. The impairment charge is noncash and relates primarily to Agilex, lower forecast cash flows post-COVID and an increase in the weighted average cost of capital to 8.5%, which was previously 7.7%. In terms of our debt management, our gearing ratio was within our original debt covenant of 3.5x. The net debt-to-EBITDA or gearing covenant has been increased to 4x for the June and December '23 reporting periods for additional flexibility. Our cost of debt has increased during the year with rising interest rates, and we were hedged at 72% as at June 2023. For next year, gearing is expected to remain within our covenants. We also have $500 million of our debt coming up for renewal in March 2025, and we will be considering our refinancing strategy as part of this refinancing program. With that, I'll hand you back to Maxine.

So coming back to the 3 messages from today. The last 12 months have been about reset so that we are best positioned for earnings growth. Looking ahead to FY '24, we are optimistic given the second half momentum. As for Agilex, we've been disappointed with the delay in earnings growth, but we are confident those challenges are now addressed and that our aspirations for that investment will be realized, albeit on a deferred basis. We will continue to be disciplined with capital, dividend and balance sheet management. So in all, we're getting on with it, and I look forward to sharing the progress with you over the next year. Thank you. Let's take your questions now on today's presentation.

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

If I could just start with the cost base. So Maxine, you've talked about the reset and we can obviously calculate the costs in the 2 main divisions. Just wondering how you should -- how you would guide us to think about the cost base going into FY '24? Can it stand still on where it was in the second half of '23? Or are we now going to see a natural uplift with inflationary pressures?

Thanks, David. Great question. Look, I think what we've done on the slide is outline percentage of the various cost buckets to revenue so that we capture the proportional revenue growth. I think the only main -- we're very comfortable with where we sit with our FTE levels, although we are going to continue to look at processes to reduce costs over time. And the only cost that we can foresee in the labor line is in our EBAs, which we have to absorb over the course of the year. Property has been relatively flat. And look, we are -- my view is that there is actually sufficient capacity in -- certainly in ACC network. So unless there are major opportunities that we see, we see that as being pretty steady. And consumables, well, it's an ongoing battle of renegotiating contracts and trying to offset inflation. So broadly speaking, I think that we will -- we see those percentages flowing forward to the coming year.

Great. That's helpful. And if we could just touch on the interest and particularly the level of hedging, maybe if you could give us some help with where interest costs are likely to come in, in FY '24? Given we're aware of the sale of the hospitals and the cash that flowed in. But I'm just a little cautious that I don't fully understand the level of hedging that's in place and how that will play out over FY '24, please?

Yes. So it's Paul here. So look, our hedging was 72% at June 30. A chunk of that drops off in September this year. We think our interest cost will be around $70 million for next year. So clearly, this year, interest rates had gone up, and our average debt level was higher as well. So that's our sort of best guess at the moment.

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

If I could start with, there was an interesting chart on Page 7 where you looked at, I guess, the Pathology segment. And note that by the time you look at that chart sort of through July, it was starting to flatten out. Has that picked up again in August based on what you've seen in Healius? And then also second part to that question is, you made a comment around Pathology volumes trending higher in second half '24. What's your view on first half '24? Is it that it's still likely to remain soft for the Pathology business?

Thanks, Lyanne. Yes. Look, I mean, you can see from the chart that there is a general trend up in referrals in GP and obviously, a stronger trend in specialists. And we see that continuing, but you can see it is well below historical averages. I mean that's a rolling 12 months, but it doesn't matter if you go back to the 2019 period, it's still about 12% down. So it's coming off a pretty low base, but still coming back. It's not whether it's coming back, it's just what that rate of recovery is, which is what we're all following pretty closely. So look, we're expecting to see that. Look, I think it's just a reflection of that rate of recovery. I think it would be bold to say to predict what actually the rate is. But based on the current trend and what we're seeing in the last 6 months and going into this year, we are seeing a continued recoveries that will just build in the second half.

Okay. And one question here, probably for Dr. Phil was around, I guess, the Lumus business. Obviously, we've seen very good margin expansion as you exited '24 towards -- or margins at around 8% EBIT margin. How do we think about margins going into next year? I know you're not providing guidance, but can we expect it to move to the low double digits as early as the end of '24?

We definitely think that the margin should stay there or even an increase. I don't think we can predict yet, but we've certainly seen coming into this from a revenue point of view, definitely continued growth. Medicare numbers just came out, and we're growing above the Medicare line for revenues. So -- and keeping the way we're going, yes, we should see our margins continue to increase. And that's the aim of the community -- expansion of community centers to grow that margin from that 8% up to -- towards the levels of 11% to 13% for the EBITDA margin in the future.

Your next question comes from Andrew Goodsall with MST Marquee.

If I could just go back to those labor costs, obviously, we can see it's down 4% on consecutive halves, and I know you've spoken to this a bit, but just trying to get a sense of where it might have landed in terms of an exit rate because, I guess, the way you progressed across the half was probably a lot faster accelerate at the sort of end of the fourth quarter?

That is right, David (sic) [ Andrew ]. And look, you've got a blend there, too, in terms of Pathology labor cost as a percentage of revenue, which has now come down to 44%, 45%. Imaging is always naturally higher. And so I think we are pretty comfortable with where both of those are in terms of their percentages at the end of the period. And the only cost change we see in the '24 period is the EBA costs across our staff.

And if I could push a bit harder. Obviously, we've looked at second half margins and where they've got to -- they continue to grow. Again, just directionally in that fourth quarter, could you give us a sense whether the extent to which they are better than the overall half?

Look, I don't think -- we're not going to give a breakdown. There's obviously a crescendo effect when you're putting in place. I mean most of the cost reset sort of was March, April and then really coming through in May and June, but you've also got revenue cyclicality in that, Andrew. So I don't think it's particularly instructive to look at breaking it down into the quarters.

Understand. And final one for me. Just when we do look at those labor expenses through the P&L., just trying to understand the redundancies are in there if they were weighing into that number as well?

So they are included in the nonunderlying costs. And so it was a fairly substantial reset program. And total cost for that, Jan is going to give you later, I think.

Total cost for the reset program was $14 million in the nonunderlying That's in the P&L.

Your next question comes from David Bailey with Macquarie.

I might just follow up on Andrew's questions actually. Is that labor cost taking partway through the second half? I mean could you give us a bit of a simple as to what the incremental benefit might be for first half '24, either in dollar terms or maybe a better question is the percentage of revenue on an exit rate basis rather than the average for the second half of '23?

Look, I think where we're sitting in terms of labor margins, we were running Pathology more at 45%. Imaging, there is an interesting nuance because we're transitioning from radiologist costs being contract revenue, so coming out of the revenue line and going into the labor cost line. But on a steady state basis, Imaging costs should be around 60% to 62% of revenue in terms of proportion.

Got it. That's helpful. And then just on the Imaging piece, if you look at the outlook for '24, there's some indexation coming through. There's a mix. Just interested in your expectations maybe around volumes? And then what are some of the things you're doing to get to that $5 million target per center?

Well, I might make a comment on volume and then I might just hand to Phil around what we're doing in terms of dealing with sort of above-market growth. So interestingly, we talked about the Imaging market recovering, and it certainly is. Most of it has been, though, in mix and the resulting impact on fee. I think the CAGR in growth in Imaging was still around about 1.6% over the last period, not this year, over the last 4 years. So volume is usually a higher proportion of Imaging. So 6% to 7% Imaging growth should really be more like 7% to 8% normal sort of recovery. And look, Phil, hand to you to talk about specific initiatives.

Yes. Look, one of the ways to increase some volume is to actually make sure that we've got fully staffed clinics, and we're -- recruiting radiologists is key. We're about 84% coverage FTE for our clinics on site. So as we move that to the right, we'll start to get -- we know that when there's a radiologists on site, we tend to get more revenue through than when it's unmanned with the radiologists. So that's one thing. We have got indexation where got out of pockets that have been relatively well accepted. And so the volumes will increase again once our competitors also have gaps there. And so the volume slightly will creep up. That's often the case when you increase -- put a gap line, you get a more drop in volume and then it eventually comes back to normal. So that will also come. And then the final thing to shift towards these higher revenue clinics is to get the modality mix shifting towards that right to get the MRIs, the PET scanners in and having the radiologists on site and volume there. So we've got a number of things driving volume as well as the increased average fee.

Your next question comes from Sean Laaman with Morgan Stanley.

Given the write-down on Pathology, you're able to give us a bit of a sense what the ongoing carrying value of Agilex is, is the first question? And secondly, given the EBITDA performance over fiscal '23, is there a chance that you get back to the original guided target that you hope to achieve in fiscal '22?

So Sean, I'll answer the first part of that question. So look, Agilex is -- it's around about half of that $350 million impairment charge. So that hopefully puts a little bit of color around it. It's obviously made up of a number of factors. Weighted average cost of capital is obviously a big part of that as well. But to give you some guidance, roughly half of that is Agilex related.

Second part of the question relates to, I think, the targets that were set out at the -- for the acquisition of Agilex. So we're expecting within 2 years from now, but we will be getting to those targets, and I'd like it to be earlier than that, but to give us sort of safe guide around where we think that will be.

And next question, just on some of the one-off costs and what we could expect for one-off costs for next year. So on the digital transformation costs, I think you called out roughly $22 million this year, $11 million last year. And I think in the presentation pack, you said the digitization program is 50% complete. So what's your sort of expectations for costs for that program going forward over the next couple of years?

So maybe I'll answer that question on -- so for next year, what we expect is the digital nonunderlying cost to be around $19 million as that program accelerates. So that's really the only thing that we anticipate being a nonunderlying apart from any further costs that we incur as part of the ACL takeover bid.

And just to clarify those takeover bid costs, that's just lawyers and bankers. Is it?

Correct.

Hello.

Can you hear us?

Hello, yes that was take over bid costs...

I said yes. Sorry, correct. That's right. Just bankers -- bank and lawyers costs, correct.

Your next question comes from Craig Wong-Pan with Royal Bank of Canada.

My question is just firstly on the D&A within the Imaging division. I noticed that kind of dropped in the period. I was wondering if that -- what was the reason for that? And then secondly, is the second half D&A number there? Is that sort of what we should expect kind of going forward? I guess, taking into account the kind of growth in community centers that you might be sort of driving into FY '24?

Yes. So that drop, the primary reason for that was the impairment of those Medical Centers. But the run rate going forward, we would expect to be relatively similar.

Okay. And then with Agilex, I mean, there's the commentary that you had a good fourth quarter run rate. Are you able to provide any comments around what sort of run rates you saw in that fourth quarter for that business?

Yes. Well, I think we said that revenue for that fourth quarter was $9 million. So that just gives us some confidence as we head into FY '24. There's obviously the business development pipeline and the one work that we have under contract at the moment also gives us some confidence that a chunk of our revenue that we've planned for in FY '24 is going to be delivered, given that we've now staffed up and have the right level of staff. And we also have the right or a much better commercial process in terms of business development to keep that pipeline flowing.

And then just following on with kind of questions on Agilex, that commercial relationship that you're in negotiations with, do you have an expected timing for when that might complete? And I guess the arrangement there -- sorry, potential arrangement, is that like as a kind of subcontractor type role to that other lab?

Look, we won't go into the details of what the commercial terms are. But safe to say, having a proposition whereby you were able to sell Phase 1 all the way through to Phase 3 with a similar set of standards is highly attractive. It's attractive for us because for us to be able to offer that as a proposition when we're selling Phase I work to say Phase 2 and 3 is done through our partner and to be able to have a global partner to do that is attractive for our selling capacity. And it's also attractive for a Phase 2, Phase 3 operator to have a Phase 1 partner that can use cost efficient is it in Australia and can get the benefits of the Australian speed of Phase 1 clinical trials. So it's a mutually beneficial partnership. But the specific timing and commercial terms we will talk to at a later date.

Your next question comes from David Stanton with Jefferies.

I'm interested to understand why you see growth in Pathology in the second half of F '24 as opposed to perhaps continuing from the exit rates you're seeing in second half F '23? Why won't we see sort of the growth in first half? Or was that not the implication from that statement on the F '24 outlook?

Yes. No, look, I don't think that's the implication. I think, look, second half is generally always stronger than the first half. I mean I think we all know that. And I think it's just that continuation of that curve, particularly around seeing the uptick in particularly GP attendances and obviously, specialist attendances are important as well. So it's more a seeing a building of that continued growth more than a reflection of first half, second half differences.

Understood. And have you won or lost any Pathology contracts that will impact F '24 that we should know about, please?

'24, look, I think no. I don't think there's -- we've won -- I think we've won 2 and lost 1, I think so, net ahead.

Okay. And my final question is, I guess, you've obviously cut Pathology costs very well. Does that, in your view, lower your revenue growth opportunities in Pathology, given what we've seen is sort of flat to slightly down sequential BAU revenues in second half F '23 compared to first half '23?

Look, I think there's a very important context here, which is the cost outs, a, focused on COVID-related activity, and b, they focused on nonrevenue-generating roles, and we were very deliberate about that. So it's more back-end efficiency. And the third thing I would say is although there were some targets or expectations set of a reset, this was actually done by the Pathology division. I'm not going to say it was easy for them, but they did it, and they did it carefully, and they did it well. Some of it was done through natural attrition, which always helps, but it was done in a very measured way. I mean, hopefully, the theme that you are getting from this presentation is that our shift is towards revenue growth. And that actually is where we want to be investing and certainly not cutting.

Your next question comes from Saul Hadassin with Barrenjoey.

Just on the digital transformation costs and that guidance for 2024. So I guess, total costs are now building to excess of $50 million. Is there a targeted return on that investment that you're thinking about from a ROIC perspective? Or how do we think about the benefits of that program over time?

Yes. Look, I'd like to take that for a bit and then Paul can fill out some more of the details. I think at the outset when the money was raised for the digital program, there was an expected benefit of $20 million a year. Some of that is very easy to see because we're frankly just carrying the costs of dual systems for a period. So at least half of those benefits will be a retirement of legacy systems. And the less -- and the rest of it is in simple things like order of validation of tests and not doing things full way. So still confident that there will be those benefits at the end of the program. Look, I -- both Paul and I are pretty focused on any dollar we spend has to create -- has to be -- have a return. We can all build fantastic systems, but naturally less either reduces cost or gross revenue, we have to be really conscious about that. So once we get past what I would call the sort of remediation of spend and bringing us to a platform that we think is appropriate. Any incremental spend will go through our threshold test. And my view is that any digital spend needs to have a much faster return because it's generally always easily replicatable. So we're going to be pretty careful about once we get to that sort of platform of what we think is market competitive, how we do spend. Paul, I don't know if you want to add anything more on costs.

No, I would not say, look, we've said that we're 50% way through this project at the moment. We -- as part of our planning for '24, we do have both a reduction in some costs, but more so revenue initiatives attached to the plans for '24. So we're not going to break those out. All I can say is that as we progress through this, we are setting targets in terms of revenue. And eventually, we will be able to reduce the costs as well. But we're kind of halfway through that at the moment. But internally, that's absolutely the way that we think about things is that the cost of capital is a very important part of any project when we undertake it.

That $20 million per year in savings, I mean, when would you expect to achieve that full run rate at year?

So if you said, we'll some lion share of program '24, '25 migration of legacy systems. So '26 would be the first year, I think, for those benefits.

And just one another one maybe for Paul. Just the balance between resuming a dividend versus debt paydown. It just maybe your net debt to EBITDA is, is there a target gearing ratio that you have as opposed -- is the preference to pay down debt before dividend, just some comments there?

Look, I can't really comment around the dividend, is more a Board issue. Our focus is clearly on capital management and paying down debt. It's a bit hard to, I think, at this stage in the cycle to have a definitive gearing ratio other than to say, it's our focus to reduce that as much as possible. So...

Your next question comes from Steve Wheen with Jarden.

I just wanted to ask a question about the corporate costs. When you look at the EBIT contribution, it's obviously nearly halved from '22 and it talks to the one of the drivers being the lower accruals for management incentives. What might that therefore look like for '24? I assume that would start to increase again from that level, is that correct?

Well, I think it's our ambition that we would like it to increase. So look, you're right. So in '23, there's no short-term incentives for the management team. And dependent upon performance, we would anticipate that if we had all our targets, the net cost would go up naturally, but on that basis, everyone wins.

Can you give any sort of what proportion of the reduction in '23 is related to that? And what proportion of it might be due to tight cost control?

Look, I might have take that offline. I think, look, the lion's share of that reduction relates to short-term incentives. But look, we have reduced costs as well across corporate. But we obviously have an envelope of corporate costs that are recharged right across the business as well. So it's a combination of both.

Incentive targets, correct? I'm just trying to factor that in because that's a driver for our throughout '24 EBIT?

Sorry, yes, we understand that.

Okay. Cool. Second question I have was just with regards to the new employment model for radiologists. Can you just explain that in a little bit more detail as to what that encompasses?

Yes, sure. This is Phil. Previously, most of our radiologists, as you heard, were contractors, who got a percentage of revenue. The new model is to bring on the radiologists on a base salary, which is appropriate to the degree of level of time out of training. So the younger ones on the lower base to the more old generation, we've got the big referral base, if they bring referral base to a larger base. And then above that, if they exceed their reporting billings exceed their base, then we have a percentage of revenue incentive for them to reach as their volumes increase. So the benefit of that for the younger radiologists is they don't feel that they're competing necessarily in the very fast senior radiologists. They have the ability to go out and talk to referrers without losing revenue -- sorry, without losing income and build up our referral base and so build their careers. And as they get -- we feel more comfortable in getting through larger volumes, then they can benefit from an incentive of a percentage of revenue. So it has been very well accepted by the younger radiologists coming out of their training schemes.

Okay. And then the next part of that, I guess, does that carry any payroll tax implications given the scrutiny on contractors versus employees?

As you heard from Maxine, we're definitely moving all our contractors into these new employment models that will shave payroll tax on them. But we just -- we're just making sure we're adjusting for that. But yes, we are moving to everyone being covered under payroll tax.

Okay. And so does that have implications in terms of margins for that division?

It does because you're essentially moving. So there's growth in the revenue and maybe I should get Paul to answer this question, given its really his question. So there is a movement from contracted revenue down to the labor cost line, and I'll let Paul answer it.

Yes. Look, I really have much else to add other than obviously, we're just changing the model so that they are employees, they pay payroll tax. And we -- at the same time, we've got various changes to our revenue model as well. So our aim, overall, I think, as Phil said out earlier, is to increase those margins irrespective of the way that we've got our business structure. So...

And then also once we get them on these contracts, it reduces our reliance on locums and locums are much more expensive than these new employment contracts.

Your next question comes from Mathieu Chevrier with Citi.

My first one is for Maxine. You referred to earlier in the call on increasing the return on capital over time. Can I ask what measures you're using and what are you targeting and by when?

Yes, sure. Look, internally, we are using -- if any new capital, we'd like to see at least a 15% return on invested capital. But it does depend on the investment. I mean so when we start to talk about some of the Imaging investments, which we think are lower risk. So for example, adding an MRI where you've got waiting list for 3 weeks, and you've got a referral and patient base, that's obviously carries a much lower risk. So in those circumstances, we would drop that return hurdle perhaps a couple of points. But when it comes to things like digital investments, I would put that at a higher return threshold, given that you need to get a much faster return. But generally around about 15% return on invested capital.

And just for the group and is that on a pre- or post-tax basis?

Sorry, did you ask a pre- or post-tax basis?

Yes. What are you targeting for the group? And are you targeting a pre- or post-tax 15%?

Yes. So that's -- so Mathieu, that's pre. And it's for the group, it's the same for all projects that we analyze. So we've basically just set up a process internally, as Maxine explained, to go through whether it's Pathology growth CapEx or Imaging, and all go through the same process and generate an understanding within our business that the return on our invested capital needs to be significantly higher than our weighted average cost of capital. So we've set that 15%. That's our benchmark. And then we assess each one individually.

Okay. And then just on Imaging, I mean what are you seeing on the competitive landscape, given that everyone is trying to get into the higher-end modalities and expanding the number of MRI licenses that they have?

Yes, that's true. There's been deregulation, as you know, in the Monash 2 to 7 regions. And for -- we had a lot of rebatable magnets in those areas, but we've actually seen little impact on us. That's actually one of the reasons why some of our competitors' revenues have grown so much. So I think Sonic MRs, which all in these regional areas. The MRI in Metro, at this stage, it's not deregulated. We have gotten a good number of rebatable magnets in Metro, but we still feel there's opportunity -- that's one of the reasons we're expanding. There is an opportunity potentially that will get deregulated in the coming years. And so we are planning for that to make sure that we've got a good fleet of MRI. When you say is it worth doing expanding into these? These are the growth areas. PET is a very big growth area, and Lumus is rapidly expanding from our 7 PET scanners. We've got 2 more in store for this year, and MRI is still a very big growth area in Imaging. So yes, we're all competing in that market, but we think we've got a very good footprint to keep expanding in that area.

Your next question comes from Chris Cooper with Goldman Sachs.

Paul, just on the impairment of $350 million. So I'm interested in the wording suggesting that the sort of component related to the lower forecast cash flows post-COVID. Is that a statement on COVID testing itself? Or is that a statement on base business recovery being a bit below expectations or something on cost? Just a clarification on that component of the write-down, please.

So it's more about the first. It's around COVID. Obviously, any impairment model is based around cash flow as full stop. So look, I think the main point here is that the Pathology CGU itself had $1.8 billion of goodwill sitting there, which $1.5 billion of that was historic. So it's not a statement about future growth at all. It's as you know, impairment is an accounting standard. It's noncash and something we have to deal with annually. So...

Okay. And just a quick clarification. I think you said earlier, the majority of direct COVID costs have been removed. Just on Slide 18, can I confirm how material the residual is and in which buckets they remain to see?

Chris, I'll take that. So during COVID, we -- for a fair amount of the time the COVID equipment that we had in labs was on a cost per reportable basis. And we made a decision that it was more economic for us to purchase that equipment, which we did. So there's about, I think, $5.5 million, which still sits there in terms of COVID-related equipment, which can be used alternatively. But that's the main overhang.

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

Thank you very much, everyone. And if there's no more questions, we'll close the presentation there. Thank you for attending.

Thank you.