Healius Limited (HLS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Healius Limited FY '26 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Anderson, MD and CEO. Please go ahead.

Great. Thank you, and good morning, everyone. We're here today to announce our full year results, provide you with some additional financial information and commentary on the performance of each of our business units and, of course, answer your questions. With me today is Andrew Thomson, our Chief Financial Officer, who you will hear from shortly. Turning to Slide 4 in terms of our group results. This slide summarizes the group's FY '26 performance. Group underlying revenue increased by 2.1% to $1.37 billion, while Pathology revenue increased by 1.8% to $1.33 billion. Agilex revenues grew strongly with growth of $5.4 million or 14.1% to $43.6 million. Group underlying EBITDA increased by 8.1% to $258.6 million, and underlying EBIT increased to $30.2 million. Pathology EBITDA increased by $15 million to $247.9 million and Agilex EBITDA increased by $4.3 million to $10.7 million. Healius had net debt of $32.8 million at year-end and remained well within its banking covenants at 1.2x. Now turning to Slide 5. This slide focuses on pathology, where revenue growth has been driven by changing the revenue mix, which, combined with flat costs, has helped improve margins. Strategically, the business is focused on margin recovery through improved revenue quality and strict cost discipline. This slide also highlights that Fair Work Commission labor cost increases are having an impact, but network and labor optimization have helped reshape the cost base, resulting in flat costs in FY '26. Importantly, the major phase of our Digital Technology program has been completed, and this has become an important value driver for the business alongside AI and automation. Operationally, Pathology revenue growth was attributable to changes in revenue mix, including growth in genomic diagnostics, B2B clinical trials and veterinary pathology. GP attendances reduced by 0.9% over the past 12 months, while specialist attendances increased by 2.9%. GP attendances have, however, grown in 3 of the last 4 months. Significant technology progress we made this year and includes the new Medway Collectors portal, an upgraded Medway Results portal for referrers that includes education and CPD opportunities for diabetes, skin and cervical cancer, along with a shortly to-be-released patient app. Artificial intelligence is being used, as we set out previously, to improve productivity with fast payback or ROI and low running costs. AI coworkers Reva and Julie have been launched with 2 additional coworkers now live in production, supporting high-volume transaction environments and workforce planning. Turning to Slide 6. This slide covers Agilex Biolabs and highlights the strategic decision that [ made ] to boost Agilex's participation in the growing large molecule market. Along with the pivot to large molecule work, the decision to exit the toxicology business has contributed to improved performance and allowed business development resources to be reallocated to other geographies, including Europe, which is showing traction. The opening of a new bioanalytical laboratory in Brisbane focused on flow cytometry is a significant milestone and the benchmark operating model for future network sites as Agilex plans to expand its national footprint across Brisbane, Melbourne and Sydney. The order book or won work for Agilex is strong and supports our FY '27 targets. On the sale process, as we've previously advised, Healius has engaged UBS to explore a sale of Agilex Biolabs. The business has received strong interest from a number of potential acquirers, and we will continue to keep shareholders updated as required. Now turning to Slide 7. This slide provides a performance update on the T27 program and shows some of the detailed progress we have made across the key pillars. A couple of callouts as this is a very busy slide. On investment in digital technology, with Medway and Pathway as our 2 modern technology systems, has strengthened our national capability across customer services and laboratory modernization. The business has made strong progress in digitizing collections with more than 80% of ACC episodes now processed through Medway. [ E-referral ] volumes were 28% higher than the prior corresponding period and 220,000 patient appointments were booked through that new capability from August 2025. We have also significantly improved our contact center response times and are imminently launching a new patient app. With regards to laboratory modernization, Pathway has enabled digital anatomical pathology with IBEX AI for sharing cases nationally, new track automation for microbiology, digitized workflows for faster genomics processing and enhancements in clinical reporting. This slide also highlights regional lab optimization, including a 24.3% reduction in FTEs compared to FY '25 as well as productivity gains made in the main lab optimization. In emerging diagnostics, genomic revenue increased by 16.9% with 15 new products launched and a focus on hereditary cancer detection. Clinical trials revenue increased by 92.9% and vetnostics has digital courier and consumables ordering fully in place. Looking ahead in digital technologies, with build complete on our further Pathway core lab services and currently being rolled out nationally, we are well positioned to leverage our systems to unlock the next wave of structural efficiencies. These include centrally shared staff for scientific tasks, automation of data entry and the consolidation of volumes for further lab footprint reductions. Finally, in people and ways of working, the slide notes $24.4 million in annualized corporate cost savings, more than 600 collectors graduating from the new National Collector Training Academy and flat FY '26 labor costs despite the Fair Work Commission decision. The slide also highlights AI workers supporting finance transactions, workforce planning and priority operational areas. And with that, I will hand over to Andrew.

Thanks, Paul. So on Slide 9, firstly, I'll move to discussing the financial performance at a group level. FY 2026 was a year of disciplined execution on cost control and tangible improvements across the group. Our underlying revenue grew by $28.7 million or 2.1%, bringing total revenue to $1.37 billion. This growth was driven by a stronger fee mix in Pathology and robust revenue expansion in Agilex. It's a clear sign that our strategic focus on higher-margin services is delivering results. Group EBIT rose to $30.2 million, in line with previous guidance and up from $17.1 million last year, a significant improvement. Pathology EBIT came in at $23.8 million, reflecting strong cost control and operational discipline in a challenging environment. Agilex EBIT more than doubled to $6.4 million, supported by revenue growth and tight cost management, which together drove that margin expansion. We also recorded $27.1 million in non-underlying items. Of that, less than 1/4 or just over $6 million was in the second half and primarily related to restructuring costs to rightsize the business and expenses related to our digital program in the first half of the year. These are strategic investments that position us for future efficiency. As required under accounting standards, we recognized a noncash pretax impairment of $332 million against goodwill. It's important to note that this is a noncash item. It doesn't impact our operating performance or cash flow. In the results this year, we also made an adjustment to derecognize a deferred tax asset of $31.5 million related to prior periods. And we also did not recognize $14 million of deferred tax assets related to the FY 2026 loss. While we've derecognized these items from the balance sheet, we do retain access to these carryforward losses and remain confident that these losses will be used to offset taxable income for coming financial periods. Interest costs reduced significantly this year, thanks to lower average debt levels. On the cost side, we exceeded our support cost savings target of $15 million to $20 million, achieving $24.4 million in annualized savings. That includes $7.3 million realized in FY '25 and $17.1 million additional savings in FY '26. We expect the full run rate benefit from these initiatives to flow through from FY '27 onwards, and we're continuing to execute further savings opportunities. In summary, we strengthened the core, improved margins and built a leaner cost base. These results demonstrate that our transformation is delivering, and we're well positioned for sustainable growth heading into FY 2027. Turning on to Slide 10, focus on the core pathology business. As I said already, we delivered steady revenue growth and continued margin improvement through disciplined cost management. Revenue grew 1.8%, benefiting from a stronger mix across specialists, hospitals and B2B channels. This improved mix led to higher average fees and underpinned the overall growth. Genomics continues to perform exceptionally well, up 16.9% on the prior corresponding period. Clinical trials also showed outstanding momentum, almost doubling year-on-year, supported by a solid pipeline and growing demand. Labor costs were held flat compared with last year. The benefits from our labor optimization program in the second half offset enterprise agreement rate increases and the Fair Work Commission's decision on gender undervaluation for pathology collectors. Consumable costs were also well controlled, down 3.8% in absolute dollar terms and reduced as a percentage of revenue from 16.2% last year to 15.3% this year. Network costs, including property, AASB 16 depreciation and finance costs trended slightly higher as a percentage of revenue, mainly due to timing differences between new site openings and site exits. The ramp-up of these cost-saving initiatives over the year contributed to stronger EBITDA and EBIT margins in the second half of FY '26. Overall, Pathology continues to demonstrate resilience and operational discipline. Moving to Slide 11, Agilex. Agilex continues to deliver strong growth and margin expansion, underpinned by a clear strategic pivot and disciplined execution by the team. Revenue growth has directly contributed to margin improvement. The EBIT margin of 14.7% this year reflects the shift in business mix as we move away from small molecule work towards large molecule programs. This transition has strengthened profitability and positioned Agilex for sustainable growth. Closure of the loss-making toxicology business at Agilex has also supported this margin uplift. At the same time, the national footprint has expanded with the new Brisbane bioanalytical laboratory performing ahead of expectations, a great example of the investment translating into operational success. The Agilex pipeline heading into FY '27 remains strong, and we expect continued revenue growth to translate into further EBIT margin expansion. The fundamentals of the industry remains solid, and Agilex is well placed to capture that momentum. As we outlined in our 13th of May '26 announcement, Healius is exploring a potential sale of Agilex Biolabs following several unsolicited approaches from credible parties. This forms part of the ongoing program to optimize shareholder value. In summary, Agilex continues to perform strongly with clear strategic direction, competitive advantages and industry fundamentals that support ongoing growth and value creation. On Slide 12, we can look at the capital expenditure and capital management for the year. Maintenance CapEx for FY '26 was $16.5 million, down from $31.3 million in FY '25. This primarily covered the replacement of older laboratory equipment and IT hardware, essential investments to maintain operational reliability. Growth CapEx totaled $26.8 million compared with $34.6 million last year. These investments focused on select large-scale collection centers, equipment for new hospital contracts, including Grampians and North West Tasmania and ongoing AI development. These initiatives are driving future capability and efficiency across the business. CapEx spend was partially offset by proceeds from the sale of property, plant and equipment, helping balance the overall investment profile. From a capital management perspective, we moved from a net cash position of $57.2 million in FY '25 to net debt of $32.8 million this year. The shift was partially due to one-off payments, including a settlement with the ATO, payments related to the divestment of Lumus Imaging, restructuring costs, digital investment and working capital requirements. Importantly, and as Paul said, we remain well within our banking covenants for both gearing and interest cover, reflecting strong financial discipline. In summary, our capital investments are targeted and strategic, supporting growth while maintaining the prudent balance sheet. We continue to manage capital efficiently to ensure flexibility and resilience as we move into FY '27. I'll hand back to you, Paul.

Thank you. So the last slide in terms of outlook. So we expect our FY '27 EBIT to be in line with consensus of $39.7 million. We anticipate that volumes are going to grow in line with MBS on a like-for-like collection center basis in addition to modest increases in profitable collection sites. Non-MBS volumes are expected to see the benefit of the full year of new commercial and hospital contracts and the continued growth in genomic diagnostics, vetnostics and B2B, including clinical trials. Disciplined cost control in Pathology is expected to contain our cost growth to 3.5% in FY '27, inclusive of the impact of the Fair Work Commission costs related to gender undervaluation and the 4.75% increase linked to Modern Awards. And due to the significant impact of the Fair Work Commission costs and reduced GP attendances, Healius expects to achieve the T27 target of mid- to high single-digit EBIT margins by approximately December 2028. In terms of Agilex Biolabs, as we said before, in terms of -- the order book and revenue conversion remains strong and in line with our expectations. With that, I will hand back and open to questions.

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

Andrew, I want to start with that last slide in terms of '27 outlook. I just wanted to understand and just clarify, when you say modest increase in profitable sites, is that ahead of the MBS or likely to be below the MBS growth rate?

Sorry, we -- so by that, we mean collection centers. So we have a very focused plan to increase our volumes next year through profitable collection centers. We have a chunk of those that have already been completed in July.

Okay. Fantastic. And just to give us an indication, what proportion would be still sites which are below your profitability thresholds?

Look, I think there's a marginal number of sites. I mean we have 100 less sites now than we did at the start of last year. So our footprint has been rationalized quite significantly. I think part of that is sites that you were talking about there, Lyanne, in terms of ones that are either not profitable or don't meet our threshold. And there's clearly other ones that we have -- that we would have preferred to have kept as well that we've lost. So it's -- the plan is to expand with profitable revenue.

Okay. And just a final question then. You mentioned you want to grow in line or you anticipate you will grow in line with MBS volumes. I guess, given what you're doing and what Healius is doing with all its initiatives, why do you think it limits your ability to grow above market?

I don't think we're saying that it limits. I think our wording there, what we were trying to get across is that our like-for-like ACC collection centers, which -- primarily through medical centers, will grow in line with MBS volumes. Where we hope to grow further than that, which we've demonstrated this year, is through genomics, through vets and through our B2B sector.

And the incremental sites that we would open this year.

Yes.

Your next question comes from Davin Thillainathan with Goldman Sachs.

Just wanted to touch on your revenue initiatives outside of the MBS. I believe the strategy there was to grow exposure to hospital contracts. And also just thinking about tests that are unfunded by the MBS at this point, so private tests. Could you give us a sense of how initiatives on those 2 fronts are going, please?

So look, I think on the hospital front, so -- around 2/3 of our revenue is bulk-billed and 1/3 of our revenue is non-MBS related. A big chunk of that does relate to both public and private hospitals. In terms of the hospital network, we've had Western Health in Victoria revert back to the public system this year. So those are revenues that -- or [ episodes ] that kind of disappeared out of the system. We obviously announced that we have renewed our deal with Ramsay, and that included Joondalup Hospital in WA for a long term. And then we've got -- we've renewed the Grampians Hospital out to 2034. So the hospital network and public hospitals in particular, I think, over the past 12 months have actually shown quite strong growth. I've forgotten the second part of your question.

The tests that are unfunded.

Yes. So look, I think similar to probably some other commentary, that's easier said than done. We were forced down that route last year with B12 and urine changes. I think what we've proven is that we are charging for B12 and urine tests, and that's broadly accepted. As for charging out-of-pocket fees for other tests that are either unfunded by MBS or don't cover the cost of actually doing the test, I think we are making some progress on that front. It's difficult. It's difficult from an acceptance point of view from referrers. And I think it's also -- it's difficult and you need to be cautious in the way that you are actually charging patients so that they understand the impact and you can actually collect the revenue. So I'd say, look, we have made progress on that, B12 and urine was a really good test case, but it's also -- it's difficult.

Yes. Okay. And my next one was just on your cash flows. If I look at the EBIT performance of the business, it is improving, but the cash flow seem to be going the other way. Now I think some of the drivers -- perhaps you could sort of help us understand that disconnect. One of the drivers appears to be this Lumus divestment payment. So perhaps if you could just explain what that is and then also just help on the other moving parts, please?

Yes. Perhaps if I could just make an overarching [ question ] first, and then Andrew can talk you through some of the quite large one-offs in FY '26. So we've obviously given guidance for next year in terms of EBIT. We talked about the cessation of the digital investment program, which was non-underlying and obviously did impact cash. So what we're saying is that we've given you consensus numbers, the business on that basis is cash flow positive in FY '27, which is different from what you've seen in that slide today and the change in cash for this year, which was impacted by a combination of things, including some of those one-offs. So maybe I'll just get Andrew to answer some of that.

Yes. So look, I won't go into every single line, but I think the key items maybe that you were asking about, there was an ATO settlement for a historic claim. And look, that was $20 million, give or take. The Lumus number that we were talking about earlier that you referenced, there was a true-up on the settlement of the Lumus transaction. I think we talked about that maybe just at the half year numbers, and that was just over $22 million. We had CapEx. We talked about CapEx during these results of $42 million. And then the digital transformation costs and the restructuring costs that came through non-underlying. So those items are also outside the EBIT number you were referencing.

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

Just wanted to understand that $15 million Fair Work case amount. Just wanted to clarify, is that the actual amount of increase in FY '27? Or is that an annualized run rate number?

So that is the actual cost that we will incur in FY '27, it's made up of 3 different amounts. So it's made up of the -- effectively the 4.75% variation between what's traditionally been kind of circa 3.5%. That's a relatively small piece. It is the changes to the scientists from the 1st of October and the additional increase for collectors on the 1st of January, which is the second tranche of the increase that they received back on the 1st of April this year. So it's a combination of those 3 things.

Okay. Great. And then I just wanted to tease out the cost savings that you expect to derive in FY '27 like over and above what you've already achieved in '26. Could you help me out with understanding what benefit that is?

Look, I think it's twofold. It's the full run rate of the changes that we have made this year. And broadly, that is the changes in our workforce upfront in the customer and commercial area. It's the changes that we've made to both our main laboratories and our regional laboratories in terms of workforce. It's changes to our couriers. And then it is the reduction in costs just generally right across the business. So those are the main factors. I think a lot of these things are gradually being unlocked with technology. I know we all, as a group internally and externally, talk about one laboratory information system. We will have that fully in place by the end of FY '27. A chunk of that is already in place. So our histopathology, we have one LIS for that. So we share work all around the network and clearly get efficiencies from that. That is the same for cytology. And genomic diagnostics will have that capability by the end of next month, which will be a major step change for the way that their workflows work, the capacity constraints that they have at the moment will no longer be there, so -- which obviously enables them to do more work and process faster turnaround time. So it's a combination of all of those things.

Are you able to put like a number to the amount of savings? Because I guess I'm just trying to struggle a little bit with what you've earned for '26, then you're facing the increased cost from the Fair Work cases and just general inflation with kind of modest volume.

Yes, without trying to give you a reconciliation, if you take the $15 million out of pathology, labor costs for next year, costs are broadly flat again year-on-year, if that helps.

The next question comes from Andrew Goodsall with MST Marquee.

First one, just if you could just characterize the second half in terms of the movements of sort of how you fared against MBS and noting that you've got the ADF contract, I think, started. And at the same time, you may have had movements with your Victorian contracts. I think that probably came to an end, Western Hospital.

Yes. Look, look, it's -- that's -- I think all of those things that you spoke of make a bit of a messy reconciliation. So Western Health obviously finished. That contract was delayed and the pricing went up across that period. We obviously did start the new ADF contract. So that started from the 1st of April and ramped up. I think mixed in all of that is just the movement in ACCs. I think that the movement in ACCs or the reduction in ACCs combined with GP attendances, which were up and down. So I think there's a lot of moving parts in that second half. I think the one thing I'd say is that from a customer and commercial sales point of view, we have a very clear idea of that ACC footprint that we have now which is reduced from what we had at the start of the year. We have a very clear picture of the hospital environment we have now with Western Health out, Joondalup renewed, the new Grampians contract, plus a range of other public hospitals that have had price increases across that period, which we will benefit from -- have benefited from in H2, but will benefit more from in FY '27. So there's a whole lot of moving pieces.

Yes. Just trying to get a bit of a run rate because really that fourth quarter was sort of probably when you stabilized is my guess, just based on movement of those contracts.

Yes, it has. And I think, look, we've given you guidance for next year. So I think that's probably a pretty good indicator of where we think revenue is heading from MBS hospitals and so forth.

And my follow-on would just be in terms of all of those contracts, I guess they seem to have settled now in a sense that you haven't -- there's nothing -- no other sort of cliffs or anything you've got coming up.

No, there's no other -- from a hospital perspective, there's not really any other. I think for us, it's mostly upside in terms of pricing, contract renewals. There's no -- as I said, there's no other cliffs out there.

And then just final one for me, just on the regulatory front. I know you've talked previously to some lobbying efforts in Canberra. Just any thought -- any sort of update that you've got that might be positive or negative on the sovereign risk piece?

Look, no update other than we continue to put our case that -- in particular with the additional cost of Fair Work. So I think that's probably an additional element that we didn't have this time last year to talk about. So I think everyone is fully aware that the limited indexation that we received last year was offset probably twofold by the changes to B12 and urine. So having the Fair Work costs added on top of that just exacerbates the situation. So no update other than we continue to mount our case forcefully with what we think is a very constructive argument.

Your next question comes from David Stanton with Jefferies.

Just want to go back to guidance and the number that you've given of EBIT of, call it, $40 million. I just want to be 100% clear. Does guidance include an impact from the $15 million of Fair Work costing costs that you've got, i.e., if you didn't have that, would you be guiding to sort of -- would you be happy with a number around the $55 million number or not?

Yes, it's fully included.

It's fully included, David, yes.

Okay. So it's fully included. So on that basis, if you didn't have the $15 million, then you'd be looking at sort of -- you'd be happy with consensus around $55 million.

Yes.

Okay. Very good. Very clear. And then second question, CapEx, can you give us some idea around maintenance or growth CapEx -- and growth CapEx for '27, please, what you're thinking?

Yes. Look, I think the number in FY '26 is obviously higher than where we'll be in FY '27. We've spent more this year on replacing some of the equipment. I think we're through that. Some of the AI spend that we've done this year is around setting things up, and we expect next year to be a lower number is the best way to say it.

Fair enough. And then I guess, on that basis then, so how do you get -- can you sort of give us a bit more color on how you get to a positive cash flow in F '27?

I think, look, without giving step-by-step guidance, I think the important thing to think about is the shape of the half 1 and half 2 numbers this year, which obviously, from a revenue perspective, normally, we see that phasing skewing more towards H2 on the revenue side. I think this year, as Paul has talked about with Western, with Hollywood and then with the new contracts ramping up, the revenue in the second half this year was lower. Now then if you look at the cost base, normally, what we see is the cost base is about the same between H1 and H2, except for kind of the working days. Paul and I have both talked a lot about the cost resetting this year. You can sort of see that in the cost base for H2 this year versus H1, and if you think -- take that sort of cost run rate and project that forward and then think about the ramp-up of some of the revenues that Paul has talked about and the other revenue initiatives and ACC growth, and that's sort of how we get to that. Also, the cash impact, as we talked about earlier, is partly driven by things like the non-underlying and the digital spend, and we had sort of $20 million of digital -- well, $20 million of -- $21 million of non-underlying in H1 and $6 million in H2. Digital spend has moved into the underlying business and is -- it hasn't gone away, but it's less. It's business as usual now. So overall, the cash component in the second half is better, and that's what we expect to continue.

Your next question comes from Shane Ponraj with Macquarie.

Firstly, you called out an underlying pathology volume growth of 0.3%, excluding changes in hospital contracts. Just wondering if that also excludes the 100 net closures.

No, no, it didn't. So that was a -- no, it didn't is the answer. So that was supposed to just set out the impact of those major changes from a contract point of view to volumes across the year. So no, it doesn't.