Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Healius Limited Conference call. I would now like to hand the conference over to Janet Payne, Group executive Corporate Affairs. Please go ahead.

Good morning, everyone, and welcome to the Healius Capital Structure Reset and Equity Raise investor presentation. Due to legal restrictions, we are unable to discuss any details around the equity raise other than the basic terms referred to in the offer announcement and presentation released to the ASX on Monday. Please refrain from asking questions beyond the specific details of the equity raise as we are legally restricted from answering those questions on this call. We will use that at the ASX on Monday on this call and refer to various slides in the presentation. So with that , I'll hand you over to Maxine Jaquet, our CEO and MD, to start the presentation.

Thank you, Janet, and good morning, everyone. I'm going to refer to a couple of slides from the presentation, specifically slide 6 and slide 7 before we turn to questions. On Monday, Healius announced a capital structure reset and $187 million equity raising via a fully underwritten non-renounceable entitlement offer. The new shares under the entitlement offer were issued at an offer price of $1.20 per share, which represents a 29.3% discount to the theoretical ex rights price of $1.70 per share. The proceeds from the entitlement offer will be used to reduce Healius' net debt. As we've outlined before, pathology and imaging market volumes were disrupted by the impact of COVID-19 pandemic and, post-COVID, have been recovering for all industry participants. Furthermore, elevated levels of inflation and interest rates have continued to drive a material increase in costs, while pathology MBS benefits have not been indexed for the last 25 years. In this environment, the management team at Healius has and continues to undertake an extensive reset of our cost base post the COVID environment. This week's equity raising resets Healius' capital structure with an appropriate gearing for the current environment. As you can see on this slide, we also announced that we have received support from our debt providers in the form of an agreement to waive Healius' net debt-to-EBITDA gearing covenants for the first half of FY 2024. Our lenders have also agreed to temporarily increase the covenant from 3.5x to 4x for the full year FY 2024 testing date on 30 June 2024. This covenant support is provided in conjunction with a commitment from Healius to reduce its total bank facilities from $1 billion to $750 million and to reduce its drawn debt by at least $150 million by 30 June 2024. The entitlement offer will allow Healius to satisfy this commitment to reduce its drawn debt. We are also not paying any dividends in this financial year. Following the completion of the entitlement offer, Healius expects to have sufficient financial flexibility and liquidity to navigate the near-term cost pressures in a post-COVID recovering market. We also have the flexibility to undertake some disciplined investment in our core businesses, including on growth opportunities primarily in the imaging division. This capital structure resets also Healius' position to take advantage of the recovery in the health care sector over the medium to longer term, which we believe continues to be underpinned by strong underlying drivers. Turning to the next slide, which is Slide 7, Balance Sheet Reset. As I mentioned on the prior slide, the proceeds from the entitlement offer will be used to reduce Healius' net debt and reset its balance sheet with an appropriate gearing. At 30 June 2023, Healius' net debt was $450 million, and its net debt-to-EBITDA gearing ratio was 3.5x. Following completion of the entitlement offer on a pro forma 2023 basis, Healius' net debt would reduce to $263 million before costs of the capital raising, which would imply a gearing ratio of 2x times underlying EBITDA. Healius would have pro forma undrawn bank facilities of $372 million, with the first maturity event due in March 2025. As a result, we expect to have sufficient financial flexibility and liquidity following completion of the entitlement offer. Turning to the next slide, Slide 8, Positioning for Recovery. As mentioned earlier, we have implemented extensive cost and capital restructure initiatives to address the challenging market trading conditions. We already undertook an extensive cost reset program through the course of FY 2025-- 2023, sorry. This included rapid removal of COVID costs from the business, first phase rightsizing the labor in our laboratories, significant procurement savings across consumables and other categories and management of divisional back office and corporate costs. This year, we continue to focus on ongoing cost efficiency and revenue reviews in light of continued trading conditions. These programs include pricing and revenue assurance initiatives, footprint optimization and ongoing general cost management to offset inflationary pressures. Collectively, these initiatives have been designed and implemented to make Healius a leaner and stronger underlying business. Together with the announced capital structure initiatives and equity raising, they position Healius to capitalize on the expected recovery in underlying industry volumes over time. I will now hand to Paul to take you through the trading update and forecast. Thanks.

Thanks very much, Maxine. So I'm just going to go through both slides 10 and 11 in the pack, which was the trading update and the outlook for FY '24. So Slide 10 slide summarizes our trading for the first quarter of FY '24. In terms of pathology, core volumes for the quarter, excluding COVID-only testing , are up 6% on the prior corresponding period. Notably, since the end of the first quarter, we've seen weekly Pathology volumes steadily improve across October and into the first 3 weeks of November. We've maintained our market share of Pathology benefits paid under the Medicare benefit scheme, which has remained constant on a rolling 6-month and 12-month basis. This is a solid outcome given the lower growth and lower value of GP-referred MBS benefits paid when compared to the growth and value of specialist benefits. COVID-only testing revenues are now negligible, with volumes down over 90% on the prior corresponding period. Agilex has continued to perform well, with growth momentum continuing from its run rate in Q4 FY '23, and it remains on track for a much stronger FY '24 EBIT contribution. Lumus Imaging is continuing to see growth in volume and price benefiting from positive modality mix shifts and indexation. The Lumus imaging business is supported by a footprint of large-scale comprehensive community sites and a strong hospital portfolio. In the first quarter of FY '24, gross revenue for Lumus Imaging was up 9% from its community and hospital sites on the prior corresponding period. This was in line with growth in total MBS benefits paid to imaging market participants. In terms of the outlook for FY '24, which is on Slide 11. So based on trading conditions that we've seen in the year-to-date for FY '24, we've provided guidance for the first half and for the full year. For the first half of FY '24, Healius now expects underlying EBITDA to be in the range of $158 million to $161 million and underlying EBIT to be in the range of $14 million to $17 million. It's important to note that the prior comparable period benefited from COVID-related PCR testing revenues of $57 million, which equated to an EBIT benefit of approximately $24 million. For the full year FY '24, we expect underlying EBITDA to be in the range of $383 million to $393 million and underlying EBIT to be in the range of $95 million to $105 million. This guidance is based on various assumptions. Firstly, revenue is historically weighted towards the second half, driven by -- mainly by greater pathology volumes and revenue. Given our predominantly fixed cost base, this results in a more significant earnings skew to the second half. You will see that the midpoint of our guidance range gives a first half second half EBITDA skew for FY '24 of 41% to 59%. Secondly, our guidance range is based on the assumption that the second half FY '24 pathology volumes are expected to grow between 6% and 8% relative to the prior corresponding period. You will understand that we are a predominantly fixed cost-based business in pathology, so of the additional revenues in H2 -- so of the additional revenues in H2, 85% of those fall through to EBIT. We triangulated this range based on several factors. The first quarter of FY '24 pathology volume growth was 6% on the prior corresponding period. We have observed an upward trend in pathology volume growth in the market in October and November weeks. Pathology revenue is expected to be approximately $600 million for the first half of FY '24. This is approximately a 5% growth on 1H '23 revenues. For each 1% change in pathology volume growth for the second half of FY '24 compared to the prior corresponding period results in approximately $5 million of additional EBIT impact. Our FY '24 guidance range includes a net benefit of $15 million EBIT in the second half from the cost efficiency and revenue initiatives Maxine talked about earlier. There are no material redundancy or other costs associated with these. Finally, the improving trends in both Lumus Imaging and Agilex will drive second half skews in revenue and, hence, performance for both of these businesses as well as pathology. All of the above is part of our full year guidance range of $95 million to $105 million, a combination of the traditional revenue and performance relating to the second half, higher volume growth expectations for pathology in that half and our revenue and efficiency reviews. All of these have a significant impact on earnings for the second half of FY '24. Thank you.

Thank you, Paul, and thank you to everyone on the call for joining us and for your support. That's the end of the presentation. We've got time left for questions. If we can, I'd like to limit each respondent to 1 major question. And of course, we are we're more than happy to answer any questions you have following this call. So with that, I'll pass over to the moderator. Thank you.

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

Paul, you just confirmed that there's no -- not material additional costs from the efficiency programs that are due to deliver $15 million in the second half. Can we understand what's happening? One, just to clarify what costs will be associated. And two, if you could talk a little bit about corporate costs. My understanding was corporate costs were going to rebound this year over the last because short-term incentives were going to be accumulated. Presumably, that's much less the case. So just a little bit of a sense as to what's happening with corporate costs would be helpful.

Sure. So look, two things. On the $15 million, it's predominantly made up of two parts. First is just reducing overall annual leave balances across the business. We have significant annual leave balances post the COVID period, where there wasn't a lot of people on leave so managing those, in particular, across the kind of December, January and then out to December to June '24 period. So that's a big chunk of it. The second part is pathology labor and costs, and that is around using our advanced rostering system. So we have uniformity across each of our major operations and the major workforce groups to ensure that we have been consistent with overtime with casuals and permanent part timers, et cetera. So we just have a more efficient way of basically rostering our -- what is a largely -- a workforce that is across the collectors, couriers and in our laboratories. So those are the two major parts of the costs. In terms of corporate costs, I think we have said that they were kind of circa $20 million, that there wasn't going to be a tick up this year because we are not accruing for short -term incentives across FY '24.

I'm just going to squeeze in one more. I mean I think I just would like to understand why you're doing the call now and not before the market opened when frankly, we wouldn't have published. It just seems unusual not to have given a briefing ahead of time when everyone could get the information at the same point.

Look, David, I think that was purely just a timing and logistics thing in the -- just how the process bore out. So the intention was to do a call earlier, but it was just -- it was a timing logistics issue.

I don't think you've done shareholders any favors doing it that way. But look, I'll leave it at that.

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

My question was just trying to understand that sharp fall in sort of earnings, EBITDA and EBIT in the first half, given that at your full year result, you had kind of reset the cost base. You have been achieving base business revenue growth. And I understand that COVID revenues have dropped a bit from the second half. But just trying to understand that magnitude of that earnings coming through because that was a real surprise for the market.

Look, I think there's two parts to that. One, is we set out for H1 obviously had $24 million of COVID-related earnings in the first half last year. The second part of it is, yes, we have reset our cost base. The things that haven't -- sorry, that were not included in that cost base as we went into 2024 was obviously wage inflation. We've got inflation associated with our collection centers and rents. That first half did have the expansion in the collection centers, which is not ongoing now, but did happen in the back half of '23. So there was a net increase in collection centers across that period. We have additional radiologist costs in the cost base in the first half, which whilst the costs go up, the revenue associated with that goes up quite significantly as well. And you also -- if you're comparing H2 to H1, there's various cost timing differences as well across those periods. And the last thing I'd say is we have, as you know, in pathology, a fixed cost base business that gets spread equally over both halves. The second half, when volumes increase, is obviously leveraged. The EBIT is leveraged to the second half quite significantly.

And then just to sort of a follow up on that, the improved rostering that you expect for the second half to drive earnings in those efficiencies, is that -- is this a new system or a new way of doing things? I'm just trying to understand how you're going to get that improved efficiencies.

So this is like the second phase of the system. And it's completing the advanced part of the rostering software that we have, putting in place experienced and dedicated rosters rather than having managers rostering staff. So it's quite a significant change to the organization. [indiscernible] fully and then automated.

Your next question comes from David Bailey at Macquarie.

Sorry I'm in a cab. Just one question for me. I mean talking about core pathology, something we haven't really seen before. As we start to model out fiscal '24 the first half and the second half, I'm just interested if you could give us the -- those -- the numbers that would have been recorded in the PCP. So your core pathology or your [ clinical ] pathology in the first half '23 and the core pathology in the second half of '23 so that then we can sort of figure out what the revenue looks like in that [ total ] of the operating costs.

Sorry. I didn't really catch all of that, David.

I think I've got it, David. It's Janet here. So yes, in terms of the forecast and the percentages that Paul has been triangulating for the forecast, we've basically taken all pathology revenue. So 2H is effectively the 587 which is the BAU and the 20 of COVID, so it gets you to 600 as your base for the 2H '23 or 600 plus. And the first half, as you know, we've got 57 of pure COVID from the old COVID codes in the first quarter, but most -- the rest of it goes into BAU. So in terms of the forecast, we're using all the volumes there. In terms of what we're doing in actuals, we've said to you that first quarter that we're just going to the midpoint. So brokers are using a range of either putting these new COVID codes all into BAU or all into COVID. We're taking the midpoint, which is just the COVID-only code, will be COVID from now on. And that's what gave you the 6% volume growth in the first quarter. So yes, just to recap, you're basically looking at a base of the 587 and the 20 for the second half of '23 for the triangulation.

Your next question comes from Steve Wheen at Jarden Group.

I also just wanted to talk to the first half number, particularly in light of your comments that were made at the full year result. You indicated that the EBITDA for second half '23 was a good base for us to use going into '24 which, 2 months later, that no longer looks like the case. So just -- what has changed within the last 2 months to actually drive this change of stance and for it to be so weak in the first half, particularly when you're looking at the margin. The margins go down in first half relative to what was achieved in second half quite considerably. And I know there is COVID PCR testing in second half, but even if you adjust for that based on the margins that you've indicated COVID testing kits, there is still a significant reduction in EBITDA margin. So I'm just trying to understand what has happened in that first half of the year, particularly when you said in second half that was a good base for us to use.

Well, Steve, I'm not sure that, that was exactly what we said. So I think what we were trying to demonstrate, and if I think I understand what you're saying, is when we were demonstrating the cost reset as I explained before, that was at a point in time once the cost reset had been done and the operating cost, the SIP program was complete. What has happened since then? So obviously, volumes despite being up 6% for that first quarter, we still have the fixed cost base, and we have had wage inflation, rent inflation, the expansion of the ACCs and those additional radiologist costs in H1, which have impacted earnings for that half. So hopefully that makes sense.

Yes. I mean that does and that helps explain the margin. But I mean, weren't those sort of costs anticipated back then? I mean there is EBAs that are driving the wage inflation. I would have thought that, that have been very well known and could have been called out at that point.

We did actually call it out Steve saying very clearly that if we didn't get the volumes through, we'd have to wear that EBA inflation. I mean at the end of the day, as Paul's always said, it all comes down to the volume.

Yes. Thanks, David. So the flip side of that is actually purely pathology volumes which make the difference to your margin.

Yes. But also, your volumes for the first quarter are kind of the sweet spot of growth that you're looking for, for the full year being the 6% to 8%.

Well, I don't think it's the sweet spot because the volumes in the second half, Steve, are higher than the first half. So the pure math on that is if you get the same percentage increase in the second half off a higher volume base in PCP, then the resultant revenue from that, 85% of that falls straight to the bottom line. [indiscernible]

Your next question comes from Tina Vou at Morgan Stanley.

Just in terms of seasonality for pathology-based business revenue. So from fiscal '16 to '19, it was about 49% in the first half. Is it reasonable to assume a similar seasonality or something more skewed?

Are you talking -- Sorry, Tina. Are you talking about volumes for pathology?

Yes. Just pathology-based business revenue, just looking at, I guess, the seasonality. It's been consistently across '16 to fiscal '19 about 49% in the first half. So I'm just wondering is it reasonable to assume a similar seasonality as well in fiscal '24?

Is that -- looking at seasonality pre-COVID, what we've seen right across not just our sector is that it has changed. So there is a split between H1 and H2. And it's probably, in terms of pure volumes, a little bit greater than 49% in terms of the first half -- sorry. Yes, so less than 49% in the first half.

I mean if I could just squeeze in one more question. And you guys shared that Healius' 6 months and 12 months rolling share of MBS benefits paid was about 24%. Could you also share what market share has been in the last few months not on a rolling basis?

Well, I think on -- sorry, on that, Tina, it's -- the reason that we do it on a 6- and 12-month rolling basis is because the volumes are so volatile on a monthly basis as you guys know. So the best way to look at these is to do it on the 6- and 12-month basis.

Your next question comes from Andrew Goodsall at MST Marquee.

Apologies, a bit of a croaky voice here. But just on the growth in the number of ACCs that you've got, I would have thought they would have -- you would have been investing at sort of ACCs and taking a higher margin on those. Has there been a sort of slower margin in the ramp-up or any other expectations changed there and maybe rents are up or anything like that?

I'll answer that. Look, in terms of what we've cycled in the last year, Andrew, we have -- our gross margin on the new ACCs has been 55%, and what has come out of the portfolio has been 35%. So we have got a greater gross margin on the cycling of our ACCs. What Paul was talking about was some independent ACCs, which obviously have a start-up cost and a start-up phase. And we're looking forward to the '24 year for that to come through in terms of revenue.

So are there any new sites at all or sites you've taken over?

Yes, we had a net 57 new sites in FY '23. So we just have the full year cost of that coming through in '24. And they're obviously impacted with volumes the same as every other site we have across the country.

Your question on rent though is a good one. And rents have definitely been higher than what we have ever seen, I think, in this sector, which I think when -- in a world where capacity -- there is too much capacity for essentially in the market , there has definitely been more competition around rents. And what we've been focused on is exactly what we have been doing before, which is focusing on our gross margin. So looking at securing obviously bigger sites and cycling out smaller sites.

And what would be the magnitude of your sort of annual rent increase that you've seen?

About -- between 4 and 5.

And sorry, one final one for me. Just indexation has come up a few times now. What's your -- give us sort of any updates or any response from the government on that one?

I can't give you a dollar number at this point in time. There are sort of 2 streams of activity that are going on with working with the government through Pathology Australia and directly with the government at the moment, both at the department level and also with the health minister and their advisers. The response has been we understand the issue. It's a credible claim and we are working directly with them on what that may look like. But no answers until we get a number in the budget , I think, which -- and we won't know that until probably March of next year.

Your next question comes from [ Train Tran at Ali ].

Can you guys hear me okay? All good? Just a quick question. On page 11 of the raise presentation, you called out the COVID impact for the first half '23 last year was about $24 million. Now if I compare that to the group EBIT of about $40 million and worked backwards, that's basically implying that for this pretty much 12 -month period, core pathology on an EBIT level is pretty much close to breakeven. That would be the implication based on the guidance for the first half '24. Is that correct?

Well, look, it's better than breakeven, but look, your theory is right, which goes back to it's predominantly fixed cost base in pathology that's spread across the year.

So can I just get one more question as well? So if I take the position of where we are today and then roll forward to a couple of like half years going into '24, '25, you have very elevated fixed cost base inflation running through. It seems like rent is going up 5. Your labor, 2 and 3. And as volume comes back, you have to add more FTE and headcount back. What's the trajectory of the EBIT margin using this business like the core pathology can get to? Because if I look back in 2019, it used to be a 10% margin business, and we are nowhere near that level. So I just wonder what's changed? What's the difference here?

Look, you're exactly right. I mean we're in a period where we've had very little BAU volume growth and we're in a different inflationary environment that this sector has ever seen. I think Paul has explained the differences between H1 and H2. But the -- but he's also explained that this is a fixed cost base. So whilst we continue to look for efficiencies, we are not expecting to add FTE. The FTEs Paul is talking about is in radiology as we grow that business, and that's revenue-generating people. Adding ACCs and adding people in those ACCs is revenue generating. When it comes to the core of the operation, there is no intention to add FTEs. We've published before the FTE reduction that has been taken particularly in the pathology business. And we intend and are working on, at this point in time, having a look at what our infrastructure looks like for the pathology business in the short to medium term and looking at how can we restructure some of that infrastructure to deleverage this business. Because you are right. The fundamental industry economics are more challenging than what they were in FY '19. And we will come back to the market in February with more details on that.

Your next question comes from David Stanton at Jefferies.

I'm just wondering, in second half FY '24, whether you're assuming any contract wins that will lead to revenue growth and, hopefully, profit growth as well in either pathology or DI?

Yes, we are. We have one which is just about to be announced next week, which is additive to the budget that we've set out for imaging for the full year and potentially another one in imaging as well. So a bit more detail to come on that when they are signed. They've been agreed. And in addition to that, you would know, David, that we have the Bupa contract for tuberculosis screening. There was a -- this has been a long-standing contract that we've had in this year. For the last 7 months, the government had reduced the amount of TB screening, that program, which impacted the imaging business. That has been reversed now by them, and we are back to our original contract level. So though we expect that to be a significant pickup in the next half. And there is also an additional contract which will be announced next week with Agilex.

So just to summarize then, please. So maybe up to 3 wins, I guess, into the commerce in DI and one in Agilex is the way we should think about it for the second half?

Right.

Your next question comes from Saul Hadassin from Barrenjoey.

Paul, I think you kind of touched on this earlier about the drop through of revenue to EBIT in pathology, sort of 80% to 85% based on the maths you've given. So just to confirm then, if we look at your guidance for full year for EBIT, is the assumption there that effectively you're assuming maybe about $100 million of sequential revenue increase in second half '24 versus first half?

It's not. No. Look, it's not that much, Saul. But look, you're right. What we've guided is that 6% to 8% on BAU volumes the PCP, which we're happy to go through some more detailed numbers after this. But look. Yes, you're right. But no, it's not as much as $100 million in terms of additional revenue in H2 based on that.

I'll give my follow-up with you guys afterwards. But along those lines, I guess, sort of playing devil's advocate for the second half, if the EBIT uplift is maybe not as significant as what you're expecting and not in a position of where net debt would get to with the paydown post the raise, are there any additional contingencies that you might have as it relates to gearing ratios as a sort of a -- I guess as a contingency as to what might happen in second half?

Well, I think we're always -- that's in the back of our mind. We've -- and I think we've talked about this before in terms of just our general capital management. We are pulling right back on things like CapEx across the business. There's lots of things that we are doing in the business in terms of efficiencies with technology, with our rostering and our labor force in particular. But as we kind of had set out for you across that second half, part of that increase is pathology volumes in that 6% to 8% range. But a big chunk of the tick up in the second half is related to imaging. And to a lesser extent, Agilex as well, which both of those businesses are tracking well.

Great. But just to squeeze one last one. And that's where I was going, just that CapEx expectations in the second half. Can you give us any sense of what you're thinking in terms of the dollar value that you might see -- that we might see?

Look, not really. I think we've guided $40 million to $50 million of growth CapEx for the year. That's going to be significantly at the lower end of that range. We're not going to put a dollar number on it.

Your next question comes from Mathieu Chevrier from Citi.

Just on the wage inflation that you've seen, what kind of level it's at, at the moment ? And then what share of your labor costs is on EBAs, modern awards and I guess, market rates?

So look, I think our -- the broad range that we have 11 EBAs that were renegotiated in '23, which apply to '24, and they were kind of just a touch under 3.5%. Overall, we've got 3 left to renegotiate this year by the end of the year. In terms of the absolute percentage of our labor costs that fall under that [ call ], can we come back to you on that to give you the split across -- against total labor?

Yes. Okay. And then in terms of the cost inflation that you've been seeing, I guess, in the first half, it's really been on people being added in the radiology business rather than just inflation being high on a per unit basis?

Yes. I think we had 25 new radiologists that Phil Lucas added to the business in FY '23. We've added 4 new ones so far this year, and he's got another 5 in train. So whilst that adds to the cost base, it's obviously we're running at end of last year 85% capacity in terms of those commissions. So you add those. That's -- there's just a direct margin uplift comes from those guys because they're revenue generators.

And Mathieu, don't forget that we're also moving radiologists from contracts onto being employed. So that if you're looking at pure costs, you're going to get an increase in the labor costs purely from the moving from a contract to being employed. No impact on it.

Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect your lines. Thank you.