Good morning, everyone. On behalf of ACL, I'd like to start by acknowledging the traditional custodians of the land on which we meet today. I'm based in Sydney on the lands of the Wangal people, one of the 29 tribes of the Eora Nation. Melinda and James are joining us from the lands of the Wurundjeri and Bunurong peoples of the Kulin Nation. We acknowledge the traditional custodians of country throughout Australia, and the places from which our participants join us on this webinar, and their connections to land, sea, and community. We pay our respects to their elders past and present, and extend that respect to Aboriginal and Torres Strait Islander peoples here today. Welcome to the investor webinar for Australian Clinical Labs' half year financial results. My name is Eleanor Padman, and I'm the Company Secretary at ACL.
I'm joined today on this webinar by our Group CEO and Executive Director, Melinda McGrath, our CFO, James Davison, and our National Marketing Director, Joe Geran. Today's webinar will run for approximately an hour and will be recorded. A copy of the recording will be made available on ACL's website after the event. By choosing to attend, you are providing your consent to participating in the recording. If you'd like more information, a copy of our privacy policy can be found on our website. During the webinar, you will hear presentations from Melinda and from James, and then we will have time for Q&A. To ask a question, you may raise your hand if you would like to ask your question live during the webinar.
If you would prefer to submit a written question, which I will then read out, you can type it into the Q&A function that you will see at the bottom of your screen. Once we move to questions, we will focus on the more frequently asked questions, and we'll try to get through as many as possible in the time available. I'd now like to hand over to our Group CEO, Melinda McGrath.
Thanks, Ellie. Good morning and welcome to our first half financial year 2023 results presentation, and thank you for joining us. I'm gonna provide an overview of the financial and operational highlights and then hand over to James, who'll go through the financials in more detail. I'll then discuss investment highlights and outlook before taking questions. Slide three, please, Joe. ACL achieved an EBITDA of AUD 99.8 million, a 28% margin, and an EBIT of AUD 38.9 million, an 11% margin, with proactive cost management in what was a very volatile environment. The Medlab integration is nearly complete with more than AUD 20 million EBIT achieved by the end of the first half financial year 2023 on a run rate basis. This is the first reporting period that is post-COVID for the company since listing.
In the December quarter, COVID revenues of AUD 13.4 million were generally offset by the cost of resetting the cost base of the business. The COVID contribution was not material to ongoing financial performance. The key highlights from this path include our margins are at more sustainable EBITDA and EBIT levels of 28% and 11% despite non-COVID revenue across the market continuing to be below trend. These margins are consistent with our historical presentations as to the performance of the underlying business. Revenue was AUD 360 million. First half FY 2023, non-COVID revenue growth of 20% versus what first half FY 2022. When compared to pro forma first half FY 2020, which was a pre-COVID period, non-COVID pathology revenue is up 22%.
Outpatient specialist revenue was up 4% on the first half of financial year 2022, and up 21% on the first half of financial year 2020. EBITDA was AUD 99.8 million. EBITDA is up 97% on pro forma first half financial year 2020, being a comparable pre-COVID period. EBIT was AUD 38.9 million. NPAT was AUD 25.5 million. Non-COVID volume remains below trend for ACL and the market for the period. The first half of financial year 2023 saw a return to positive pathology market outlay with growth 5% on the previous pre-COVID period. The second half of financial year 2023 started strongly with non-COVID revenue growth in January 2023 of 22%. We had good cost management in a subdued revenue environment for the market.
We had a proactive COVID transition plan, which anticipated that the management of COVID testing would include a slow downslide of COVID revenue. In Australia, unlike most other countries, we had a huge infrastructure to support the collection process that we had to unwind. In the end, there was a steep decline before the September holidays, and the teams did an excellent job. We only had a few weeks discrepancy in September and October, which were difficult to manage due to the school holidays. We maintained a solid cash generation with free cash flow before interest financing and tax of AUD 25.5 million. We've declared an interim dividend of AUD 0.07 per share, fully franked, which is 56% of the first half 2023 NPAT.
We're looking forward to an improved revenue environment and are focusing on ensuring Medlab synergies hit the bottom line in the second half of financial year 2023. We're also focused on growing non-COVID revenue across the country, growing market share in New South Wales and Queensland, post Medlab and SunDoctors acquisitions, and delivering on our ESG goals. Next slide, please, Joe. Now to our operational highlights. The Medlab integration has been completed ahead of schedule with annualized EBIT performance post synergy exceeding AUD 20 million on a run rate basis by the end of the first half. This is well ahead of our initial forecast at AUD 14.5 million and previously forecast to be achieved 24 months post-acquisition. We're now focusing on embedding our changes and benchmarking the integrated service to ensure efficiency.
I'd like to take this opportunity to congratulate our state CEO, Chris Brownlow, and his New South Wales team on their excellent project management and change management and empathic leadership. They not only integrated the business, they also successfully managed BAU while downsizing more than 50 COVID drive-throughs at the same time. The teams are fully integrated and contributing to what is now an exciting shared vision for the future. I'd also like to thank the Medlab teams for the way they've embraced the various challenges and become part of the Clinical Lab story as we continue to grow. We're also really pleased to say that we've renewed a major public hospital contract, and negotiations are well advanced with another of our long-term partners.
We continue to capture market share with first half 2023 non-COVID Medicare revenue growth, excluding acquisitions, of 7%, ahead of the broader market, 5%. Following the upgrade of the base LAS, which was completed in the previous half, 100% uptime was achieved in this half. Capacity to scale the lab information system materially is now in place. We continue to successfully pursue strategic adjacencies, including clinical trials, where we're now the largest provider of pathology services for Phase I CROs in Australia. The team has achieved this through organic growth and customer wins. Next slide, please, Joe. We continue to drive our ESG performance, and I'll highlight a few of our achievements.
In our efforts for the environment, we've reduced our carbon emissions from 1.4-1.06 kilograms of carbon dioxide in the year, which is a combination of the application of our energy and our logistics activities. We are also rolling out cold storage direct to the lab fridges, removing tons of Styrofoam and wasted packaging. This will be rolled out across the country. I also want to highlight a work in progress, our paperless project, which has increased digital referral, referrals as one measure from 11%-16%. This reduces paper, but also impacts accuracy and minimizes manual data entry. It has many flow-on effects.
On the social side of things, we've reduced our LTIFR significantly, and our customers rate their experience at 4.7 out of five using the automated SMS satisfaction measure system that we've had in place for several years. We've commenced Phase II of our Women in Leadership training program. This program involves personalized development and coaching programs for targeted women. From a governance perspective, we've changed our board composition with our female representation up, and we have a search process underway. We commenced the reflect stage of our reconciliation plan, and we've instituted an internal audit function reporting through to the audit and risk committee. I'll hand over to James now to provide more detail on the financials. Slide seven, please, Joe.
Thanks, Melinda. Good morning. As Melinda has discussed, the last half and especially last quarter was really a return back to much more normal trading following the last couple of years of heavily COVID-influenced results. For some of the key metrics, I'll be comparing against one half 2020, with it being the most recent pre-COVID period. In terms of percentage changes for revenue and growth, we adjusted for working days, with the first half 2023 having two fewer work days than both first half 2022 and first half 2020.
Just to recap some of the headline numbers, total revenue for the half was AUD 360 million, which included non-COVID revenue of AUD 315 million, which was up 20% on prior corresponding period and up 22% on pre-COVID H1 2020, or excluding the impact of the Medlab Pathology acquisition, up 7% and 9% respectively. COVID revenue of AUD 45 million for the period was very much skewed towards the early part of the half, with 70% of that revenue recorded in the Q1. Against H1 2022, COVID revenue was AUD 226 million or 83% lower.
EBITDA of AUD 100 million was down from AUD 239 million in first half 2022, but almost double pre-COVID first half 2020. EBIT of AUD 39 million was down from AUD 191 million in first half 2022, but AUD 33 million or 518% up on pre-COVID first half 2020. A few other key highlights for the half were the Medlab integration being materially completed with phase synergies achieved throughout the half and full run rate of over AUD 20 million per annum to flow through from the second half onwards. We continued to grow faster than market with our Medicare pathology revenue, excluding Medlab COVID and all non-MBS commercial work growing at just over 7% for the half versus the comparable Medicare market at around 5%.
Our outpatient specialist revenue was up over 4% on prior corresponding period and up almost 21% on first half 2020 on the back of a fairly flat specialist consults market. We have further upside due to our strong private hospital positioning with Medicare inpatient volumes still flat on pre-COVID levels. Driving our improved performance on first half 2020, excluding one-offs, we've been able to decrease labor as a percentage of revenue from 50% to 42%, other costs from 14% to 13%, consumables excluding COVID from 17% to 16%, and held depreciation and amortization flat at 17%. The second quarter, which had much less COVID, labor efficiency as measured by episodes per work hour, improved 8% over the same period in FY 2020.
The EBITDA margin of almost 28% for the half is in line with our targeted sustainable level, noting higher-than-expected ongoing COVID, especially in the first quarter, but with some Medlab and market catch-up still to flow through. We had an EBIT margin of 11% and NPAT for the half of AUD 25.5 million versus break even in first half 2020. Next slide. Next slide, please, Joe Geran. We remain committed on converting our earnings into cash flows. For the year, ACL generated AUD 25 million of cash before financing and investing, which was in line with NPAT. The conversion of cash EBITDA to operating cash flow was over 76%, and as with past years, we expect improved performance in the second half to deliver a full year conversion of around 100%. Non-cash items includes the AUD 5 million Medlab deferred consideration write-back.
As previously detailed, the Medlab acquisition had two deferred components of AUD 5 million each, one time-based and one performance-based. As Melinda has discussed, the performance of the acquisition has exceeded our initial forecast, and the write back of the deferred consideration is not due to underperformance, rather the fact that it was set on non-COVID BAU re-revenue returning to trend. CapEx for the half was AUD 4 million or 1% of revenue and included almost AUD 1 million of Medlab integration-related capital expenditure, with full year CapEx expected to be around AUD 10 million, in line with the average of the last five years. Financing investing of AUD 36 million comprised debt repayment of AUD 17 million, interest paid of AUD 1 million, and tax payments of AUD 17 million, with AUD 7 million relating to FY 2022.
Tax installments for the first half were based on the FY22 installment rates and have now been adjusted down to reflect our estimated FY 2023 tax payable. As such, the cash outflow will be materially lower in the second half. Next slide, please, Joe. We have a very clean and strong balance sheet. We are very conservatively leveraged with net debt, excluding lease liabilities of AUD 50 million, being able to only 0.4x LTM EBITDA on a AASB 117 basis points, and total net debt, including lease liabilities, being 1.3x LTM AASB 16 EBITDA. The main drivers of the balance sheet movements were a reduction in debtors, creditors, and inventory, being a normalization for COVID.
Other current assets increased due to the tax installments being higher than required and having a net tax asset and corresponding reduction in tax liabilities and the reduction in the deferred consideration. Current assets over current liabilities, excluding lease liabilities, improved to 1.3x versus 1.1 x at the end of FY 2022, and the final dividend will increase pro forma debt, net debt to around AUD 64 million. Thanks, Joe Geran. Back to you, Melinda McGrath.
Thanks, James. We're heading towards two years post-listing. I wanted to take the opportunity to review our key investment highlights. We've materially outperformed prospectus forecasts across FY 2021 and FY 2022. Our non-COVID Medicare revenue growth, excluding acquisitions from the first half of FY 2020 to the same half FY 2023, is 7%, outperforming market growth of 5%. We've delivered superior EBIT margins to our Australian listed only company competitor in all periods since IPO. We've provided dividend returns to shareholders in FY 2022 at 60% of NPAT. The board dividend guidance remains at 50%-70% of NPAT for FY 2023. We had a strong performance during COVID and achieved record profitability. We achieved leading EBIT margins of 27% in FY 2022, compared to 21%-23% achieved by our larger listed competitors.
Post-COVID, we've also had a strong result with an EBIT margin of 11% and non-COVID revenue increase of 22% first half 2020 to first half 2023. We've successfully pursued strategic adjacencies, including clinical trials and skin pathology. We've grown our footprint in New South Wales and Queensland, delivering market share expansion. We've brought new tests into Australia, including various genetic tests, and we've won and renewed a number of material contracts in recent years. Slide 12. Thanks, Joe. We've a strong acquisition track record, completing and integrating five acquisitions over the past seven years, and we've communicated and executed on a clear, consistent strategy. Our most recent acquisition, Medlab, completed at 6.2x financial year 2021 EBITDA, ahead of schedule and delivering EBIT impact to exceed AUD 20 million, well ahead of forecast.
We generated free cash flow of 12.2% of revenue over financial year 20 21 and 2022 and the first half of 2023. Our CapEx averages 1.7% of revenue from financial year 2021 to the first half of financial year 2023 due to our focus on expensing costs rather than capitalizing. We believe this provides investors with a clear view of our actual performance. Prior to IPO, we invested more than AUD 85 million in our business, and for the past few years, we've had ongoing CapEx of AUD 8 million-AUD 10 million per annum. We don't see any reason for that to change into the next few years, aside from acquisitions and growth CapEx. We have appropriate gearing for growth opportunity. We've got a strong balance sheet with a net debt position of AUD 49.8 million at 31st of December, 2022.
Our single unified lab information system is delivering operational efficiencies. No major CapEx is required for LIS improvements. All major laboratories have been upgraded in the past six years. We have a continuous upgrade program as part of our normal CapEx program. We have new purpose-built sites in South Australia and Queensland, with upgrades in Victoria, New South Wales and Western Australia. We just upgraded the New South Wales lab to facilitate the integration of Medlab. Next slide, please, Joe. Now on to our growth plans. Due to COVID, our footprint has been underutilized. We really look forward to driving some revenue over our current fixed cost footprint. We're going to maximize the revenue benefit of the Medlab acquisition and expand our market share in New South Wales and Queensland. Again, that is over this current footprint.
We'll also maximize the growth of potential of SunDoctors post-COVID, and we're going to expand this excellent patient service nationally. The current growth there is again over our current footprint. We anticipate, and we're already seeing a rebound in organic growth and catch up in GP practices. We're already seeing a rebound in growth from public and private hospitals. We have long-term contracts with the number two and number three private hospital groups and major public and private hospitals. This flows through to specialist outpatient work where we have strong market share, which is already rebounding. We anticipate post-COVID reinvigoration of our Northern Beaches Hospital growth plan, which includes the Northern Sydney corridor, which is growing well. We've renewed our material public hospital contracts.
COVID and respiratory collections are now being performed once again in our current collection centers, which maximizes the value of our collection center footprint. We're seeing clinical trials growth in our Melbourne and Queensland labs. Personalized medicine has been growing really well even throughout COVID with human genetics growth at double digits. Of course, we're always open to further acquisitions at the right price and strategic fit. Slide 14, please, Joe. From an operational point of view, we continue to focus on driving increased operational efficiency through various levers. Our national connectivity drives best practice. Our single LIS provides an ongoing structural advantage, and we continue to improve underlying workflows and systems nationally. We'll benefit from the run rate synergy realization from the Medlab acquisition. We benchmark and we implement best practice labor fortnightly based on forecast volume.
Our labor management tool forecasts rosters to optimize them in advance of the cost being incurred, which is particularly useful post-COVID and at Christmas and New Year, and of course, the unplanned Queen's Memorial holiday was a good example of where we were able to minimize our labor cost. Our GPS tracking system is being refined and applied across the country, and also to acquisitions to minimize kilometers traveled, labor costs and environmental impact. Our recent investment in technology and change to Oracle provides a more resilient performance with reduced downtime. Our paperless project and e-ordering system streamlines the order process, and as I said earlier, we're only at 16% here, so there's quite a lot of upside to go. Consumable price is well managed, and we see volume-related and inventory management business opportunities.
Inflation impact is mainly seen in general expenses such as transport and freight, and we have a range of digital front-end activity to streamline the process and other automation opportunities. Next slide, please, Joe. We've talked a lot about the quality and depth of our people, our performance-oriented culture, our LIS, which we believe is a competitive advantage. We've put together a slide of financial indicators compared to our competitors, and as you see, our performance has been stronger than our peers on many ratios despite our smaller size. Next slide. Thanks, Joe. A slide on valuation metrics. Next slide, please, Joe. We believe our strong performance compared to our competitors, despite our relative size, is underpinned by an operating model driven by the strength of our clinical service, our management culture, our unified laboratory information system and our internal systems and processes. Firstly, our culture.
We have very competent, experienced and stable teams at levels deep into the organization. These teams understand what we're trying to achieve, and they're very aligned. They understand and believe that our values include performance at all levels, clinical quality, service to our customers, financial performance, and shareholder and stakeholder results. This alignment is very difficult to replicate, and it takes years to achieve, and it's evident in our recent agility. Secondly, our single instance of our lab information system allows us to benefit from lowered costs, less duplication, and improved ability to benchmark efficiencies and encourage all to achieve best demonstrated performance. We are also able to design and implement customer-facing programs effectively, and we only have to design the tech side of this once.
This is a competitive advantage. There are significant barriers to change to this model, which are high risk for revenue and operations, and for labs, there is also clinical risk. Thirdly, led by our Chief Operating Officer, Anthony Friedli, who is a Six Sigma Black Belt, we established systems that allow us to focus on business improvement to service, revenue, and efficiency. We have a permanent team of business improvement managers who work nationally with state leads to improve systems and performance. I mentioned some of the things that they're working on in the slide two slides earlier. Lastly, we're very disciplined in our capital management while ensuring excellent customer service and improvement on behalf of our shareholders and stakeholders. Slide 19, please, Joe. On to outlook.
In the second half of financial year 2023, we'll focus on ensuring that the full Medlab synergies hit the bottom line. We want to ensure that the synergies achieved through the first half will hit the full EBIT run rate exceeding AUD 20 million per annum, realized in the second half of 2023. Capturing growth in non-COVID revenue. Prior to COVID, the Australian market grew at, on average, about 6%. Year to date, second half financial year 2023, our non-COVID volume grew by 9% over the prior year. Not only will we benefit from the return of organic growth over our current fixed cost footprint, we're also focusing on growing market share in New South Wales and Queensland following the acquisition of the SunDoctors and Medlab. We're motivated by our ESG goals, including finalizing our reflect stage of our reconciliation action plan.
Revenue for the second half will be dependent on the pace of recovery in the underlying volumes. While we expect revenue to return to trend over time, the timing of this recovery is hard to forecast. We don't plan to provide any guidance for financial year 2023 at this time. We continue to believe that low double-digit EBIT margins are achievable for the future. I'll now pause for questions. Thanks, Ellie.
Thanks, Melinda. We've had a number of people raise their hands. I think Lyanne Harrison was the first off the mark. Lyanne, please go ahead.
Good morning. Can you hear me okay?
Yes, ma'am.
Okay, fantastic. Congratulations, Melinda James and your team for managing costs, obviously amidst declining COVID revenue and inflation. I might start with there. You know, labor costs for the half sit at 41.3% of revenue. How should we think about labor costs going into second half 2023 and then also into 2024? What sort of pressures are you still seeing in that market?
I'll start, and then James, you might want to comment. Thanks, Lyanne. I, the teams did a very, very good job and it was really hard to predict what was going to happen with COVID this half. We have got a, you know, big collection center footprint now and hospital laboratory footprint. None of that has been fully utilized over the last two years due to COVID and underlying BAU volumes. We anticipate that the revenue will be driven up over our current fixed cost base. As I said, we're managing that really well. The teams are very aligned. We have very little turnover.
I mean, we ensured we had a good team, pre-IPO, and we've had very little turnover, so people know from a management point of view what to do. They're using the automated forecasting tools that we've got, and I think going forward, you can expect the revenue to be over that current fixed cost base. Did you have something to add, James?
Yeah. I'll just add, in terms of raw dollars, the expectation is clearly that second half labor will be lower than first half. As Melinda said, we have significant capacity in the network to be able to absorb volume increases. In percentage terms, it will obviously be a little dependent on where revenue goes, but in actual dollars, it'll certainly be lower than first half.
Okay. Just to clarify, in terms of the actual, I guess, salaries, that you're paying your staff, you're not seeing any upward, much in the way of upward pressure there?
Yes.
Effectively that's matched to inflation?
Sorry, I should have answered that earlier. No, we've got long-term EVAs in place. The main areas of inflation that we're seeing is transport and freight. And a little bit in the areas where we're competing with other businesses such as finance and not so much IT actually, but mainly finance areas. That's a very small percentage of our total costs. Labor is not an area that we're overly concerned about. James, did you wanna add anything there?
Right. Thanks, Laynne . I think the next question is for Gretel Janu.
Hi. Thanks very much. Just firstly, can you split out the proportion of volumes that come from specialist versus hospital and GP referral channels? Like, I guess your peers specifically called out strength in specialist hospital, and weakness in the GP referral channels. Is that consistent with what you're seeing?
Yes. We actually divide the specialist market a little bit lower than that down to histology, which is driven from theaters, and general clinical pathology, which is driven in the wards. We see two different parts of that hospital equation, which is part of the specialist equation. The medical patients, clinical patients are performing well and have generally performed well throughout COVID. The histology driven by the theaters is for us and other pathology businesses is an expensive part of the service because every specimen is read by a pathologist. That market is lower than normal. Yes, specialists are growing better than the GP market, although it's starting to catch up. James, you might want to have something to add to that.
Specialist consults on the most recent data that just come out still has them reasonably flat. Obviously, we've covered our numbers being up 4% on prior period, and we're up over 20% against pre-COVID. The outpatient specialist market certainly growing a lot stronger. Inpatient volumes, as I mentioned, still remain depressed. Specialists overall probably represent around 30% of our total revenue.
Right. Very clear there. Then just in terms of that non-COVID revenue growth of 7% Ex Medlab, how much of that is volume as opposed to price or mix?
Yeah, it's a combination of both. I'd have to pull out the exact split between both, Gretel. I don't have that to hand.
Okay. not mostly price or mix driven.
No, it's a component of both.
Okay, great. Just secondly as well, in terms of that 22% growth that you called out for January, you know, it's comping a very heavily Omicron affected month last year.
Right.
How can we think about that growth rate, you know, on a more normalized basis relative to trend at this point?
Yeah. I'll just clarify the first point. Obviously, that includes Medlab in it. Medlab settled 20th of December, so it's a like-to-like in terms of acquisitions. It's certainly come down a bit in February as would be expected, but it's still a lot higher than what we'd seen during the first half, and especially in the period lead up to the Christmas outbreak.
Excellent. Thanks very much.
Thanks. Next question for Rod Sleath. Rod, go ahead.
Hello, can you hear me?
Yes.
Yes, we can.
Oh, fantastic. I've got over the technology hurdle to be able to speak. First of all, congratulations on the results. It's great to see those margin levels despite the fall in COVID revenues. Can I come back to COVID very quickly? Sorry, I think I partially missed a sentence early on in your discussion of the results. Did you say that effectively there was no margin effect of COVID in the first half results? Within that, I just want to understand by that, do you mean that effectively there was zero profit from COVID testing, or that COVID testing was kind of in line with BAU margins in the first half?
As a third part of that same question, just wanted to just clarify how you're treating, multiplex testing that includes COVID tests when you're talking about BAU and talking about COVID testing. Are you taking a portion of that revenue as COVID testing, or you taking all of that revenue as, BAU? I guess that was the first question, if that's okay.
Sure. I guess... Just remind me if I miss any of them. No, the COVID was still certainly added value to the results, particularly in the first half where we saw sort of 70% of the COVID revenue and 57% in the first two months. What the point we're making, I guess, was the second quarter in particular, you know, the fee was further reduced, and we're also carrying a significant amount of additional cost and infrastructure to support that revenue. The unwinding of that much more normalized the profit impact as to what we'd sort of seen in previous years. The next one in relation to how we're treating COVID revenue and calling it out. Yes, we're separating.
For the first part of the year, it was obviously much easier when COVID had unique items. We're also able to separate out for all of the multiplex and PCR testing, which ones have COVID and which ones don't. We're really quarantining as we have all along, true COVID revenue versus non-COVID revenue. I'm sorry, was there one more in there?
No. I think that's the main part on those ones. Can I just come quickly back onto Medlab synergies? I'm just sort of thinking of the run rate of those synergies. Should I be looking at that overall for fiscal year 2023, we should be seeing in your P&L a positive effect of something like sort of AUD 15 million, given that you're at full run rate or close to full run rate now, and presumably there was some benefit in the first half, and then we should see...
Yeah, absolutely. Yeah. That'd be fair.
Okay, great. You have obviously upgraded those expected synergies, you know, from AUD 15 million to AUD 20 million, now to, you know, at least AUD 20 million. Are you able to give any? Are we talking about a little bit over AUD 20 million, or do you think there's quite a bit more benefit to come through?
A big part of the benefit still to come through is obviously around revenue from the Medlab portfolio continuing to increase. We've also still got our benchmarking and best practice. We'd identified a number of synergies around role duplication and things like that, which have all been achieved. From there now it's just into a more BAU thing, which is best demonstrated practice, where we benchmark all of our labs and make sure they're all achieving the required levels. There will be some upside, but how much more than that is sort of hard to say.
Okay. Terrific. One more question, I guess, just on margin. You know, that low double-digit operating margin of, you know, around 11%, which obviously still included a high portion of COVID revenue in the early portion of the half. Is that a sustainable level? Sorry. To see that going forward, I presume you need to see the level of COVID revenue that we saw in the first half, or maybe a little bit less, replaced by BAU growth. Is that a fair comment?
You sort of remember with the, with the COVID revenue, obviously in the historic numbers and especially Q1 and earlier, there was a significant amount of additional infrastructure that were required to support that.
Yeah.
Given now that it's coming through the normal, channels, yeah, we will need some of the BAU volume to offset it. Likewise, because we have the collection center infrastructure and collections and couriers and everything else, obviously the incremental margin on that, on the Medicare BAU work coming back in will be higher than what it was for the COVID. It will need to be offset to somewhat, but not in its entirety.
Sure. Okay. On those incremental margins, I think in the past we've sort of discussed a sort of 27%-30% EBITDA margin on incremental business, which obviously drops through to EBIT better because you're not increasing D&A. Is that still the way you sort of look at the business or, and have I understood that correctly?
Yeah. Correct.
Yeah. Great. All right. Thank you very much.
Next on my queue, Craig Wong-Pan.
Great. Thanks very much. Just wanted to ask about the additional costs incurred to wind down your COVID activity. Just wondering, is that included in the AUD 1.7 million of acquisition restructuring and other one-off expenses? If not, could you quantify what that amount was?
No, it's not. It's probably not an easily quantifiable number, Craig. It's, it's obviously management time and effort and, you know, moving things around and stuff like that. It's not. We have always had, obviously a preference just to expense as many things as possible. If it's not easily identifiable, like if it's project management office time and things like that, then it just goes through and is expensed as we go.
Okay. Fair, fair enough. Then secondly, just the D&A, the cost for the half was a bit higher than I had expected. Is the first half number a good kind of proxy for what you expect for second half D&A?
Yes.
Okay. Just my last question. The tax rates seem to be quite low for the first half. Could you talk to that, like, to why that's the case and what we should expect going forward?
Yeah. 30% will be much more normal. The difference really relates to the deferred Medlab consideration.
Okay. Perfect. Thanks. That's all my questions.
Thank you. Coming down my list, Nathanaël Cherrier, would you like to go ahead, please? I think I've just lost him. Okay. I'll come back, Mathieu, if you can raise your hand again. Lyanne, I think you might have had another question, so I'm going to unmute you.
Yeah. Hi. Yes, Eleanor and Mel and James, I didn't get to finish my questions last time. Previously when we went through the IPO stage, you talked about a target EBITDA margin for ACL at about 27%. Obviously, you know, we've reached or beat that this half. Do you have a revised target margin or something that we could look for, aim to in the next, you know, two to three years?
back to the point Melinda's raised in our outlook. We continue to believe that low double-digit EBIT margins are achievable, Lyanne, as volume returns.
Lyanne, can we just-
Okay.
Can we just, celebrate this one first?
We are celebrating. We are celebrating, Melinda.
I just wanted to go back to James' comment about the COVID revenue too. For us, COVID margins were not that different compared to BAU margins. With the fee cut, obviously we really wanted the COVID to go through our collection centers. You know, I don't know how long we're gonna have to pull COVID out of our, of our work, but once we get the BAU back over the fixed costs, we can. That's why we're happy to say that we've got that sustainable margin, at least that sustainable margin that we've called out there, Lyanne.
Okay. Could I just then ask on revenue? Previously in your presentation, you've called out, you know, the growth rate you've seen in pathology by various states, you know, Victoria and other states. Can you comment on that and what you saw in the first half?
James, do you wanna get that one?
Um, hmm.
They're all very different. One other thing while he's checking that out. With the specialist growth too, we're noticing telehealth is dropping off, which is really interesting. We think that's gonna start really going quite well. All of the states are different. James, have you got an answer to that question or you're pulling something up?
Yeah, sorry, I'm just having a quick look at it by start. I don't, I don't have all the numbers from my head. New South Wales was particularly strong. WA were probably the two standouts in terms of growth on prior corresponding period.
Mm-hmm.
In terms of growth, against pre-COVID. Sorry, just one second. Everyone was quite similar.
Sorry, can you just repeat that last comment?
Yeah. WA once again was a bit of a standout, but obviously it's a smaller market. Everyone else was quite similar on the pre-COVID period.
Okay, great. Thank you. Just one last question. You mentioned SunDoctors and how you were looking to expand that nationally, as part of the organic growth. What sort of timeframe and what sort of rollout can we expect?
SunDoctors had, has its own growth plan of its own footprint, growing clinics. It gets a fair amount of external referrers and internal referrers. They've been hampered pre-IPO, well before we bought them by not having access to national logistics. They'll be able to access our national footprint and grow nationally, which is already happening. Timeframe is a bit difficult. It's affected by the macro environment with GPs.
Mm-hmm
...with GP availability. It's growing very well at the moment. Growing nationally, requires, you know, the GP environment to improve as well. James, did you have any more color on that one? I can't, I can't give you a timeframe on that, Lyanne, but the guys are working really hard on that one.
Okay. Thank you very much.
Matthew, I can see you back on the board again, so please go ahead and ask your question.
Hi, can you hear me now?
Yes. Thank you.
Excellent. Thank you so much. Good morning, Melinda. Good morning, James. Thank you for taking my questions. I just had one on EBIT margin. I calculated it on an underlying basis, excluding the one-off revenue and cost. Your EBIT margin was roughly 9.5% in the first half, and then, looking at second half, can I just confirm that you're expecting EBIT margins to be roughly at least in line with what you did in the first half on the reported basis being around 11%?
Yeah. Low double digits. Yes. Obviously that's dependent on like trading conditions continuing to strengthen through the second half. Yes, that would be what we'd expect.
Okay. Thank you.
Just on that, just on that Medlab acquisition, though, we did negotiate well on the price, and we managed to put in the deferred payment was based on whether underlying growth was going to come back or not. That underlying, that payment was because the underlying growth did not come back. If you assume that the underlying growth is coming back, then we would have had that revenue anyway. One, it's, you know, one way or the other, we would have had the upside from the revenue or the not paying the deferred payment. I just wanted to make that comment.
Yep. No, thanks for that. That's clear. How should we think about seasonality going forward now that you're on a, I would say, a more normalized run rate?
Yeah. Generally speaking, pre-COVID, for pathology, the second half would be slightly stronger in terms of profit than the first half. You know, sort of 47%, 53%, 48%, 52%. Assuming a more normal trend and the uplift in BAU volume continuing, yes, we'd expect the second half to be stronger.
Okay. Thank you. Just one final one on the rents. I see that it's grown about 4% sequentially, in the first half. I was just wondering whether that's COVID related or is that a BAU run rate of what you would expect, now that perhaps some of your rents are indexed to, inflation and CPI?
Yes, there's a little bit of COVID still in it for the first half. There was still some COVID specific sites that were being unwound, which will certainly have a little bit of an impact. Some of it's CPI and some of it's new sites coming on board.
Great. Thanks very much.
Thank you. Next to ask question, Tom Godfrey.
good morning, Melinda and James. Thanks for taking my questions. Can you hear me okay?
Yes, Tom.
Yes.
Great. Can I just circle back to the question around costs, presumably sort of the unwind of COVID OpEx and infrastructure throughout the half is annualizing into the second half. Can you just give us a sense for sort of what the cost benefit might be into 2H 2023?
Yeah. I'll have to take that one on notice, Tom. I don't have a number to hand for that.
All right. We'll circle back on it. Can I just have a follow-up to Gretel's question just around the strong start to the second half as well and the 22% growth? You don't have the comparable growth for Jan 2022 to hand, do you? Just so we can contextualize that number.
Comparable. That is on 22.
What the business did in January 2022. Was it a negative comp? There are obviously plenty of disruptions playing through. Just trying to get a sense for the comp growth.
Oh, against prior year? No, I don't have that with me. Sorry.
I'm striking out on all fronts. Maybe just last one just around the cash conversion. I think you made the comment that you're expecting it to improve into the second half. Just wanted to get a sense, was it just those sort of one-off, you know, adjustments and gains in the EBITDA? Just trying to get a sense of the 76%, what was actually driving the weakness there?
Yeah, sure. It was certainly impacted by the non-cash items. They're or the one non-cash item. Also, and this has been the case sort of every year we've reported, the working cap movement through the first half is always a bit different to what it looks like in the second half. Where I think last year was low mid-eighties, and not dissimilar the period before. It really is more of a seasonality issue than anything else.
Gotcha. Okay. Thanks, guys. Appreciate the questions.
Thanks, Tom. We have a couple of, written questions as well that have come in, which I'll read out. The first is from Hari Abi. How much of the 22% growth in January 2023 non-COVID revenue is driven by Medlab?
Yeah, and that's none, it's a like for like. Medlab was acquired in December, so January was, Medlab was in both periods.
A another written question from David Bailey. Is the change in the Medlab contingent consideration of AUD 5 million captured within the 1H23 EBITDA of AUD 99.8 million?
Yes, it is.
Fantastic. Thank you. That's all our written questions. Rod, I think you've got your hand up again, so I'm going to unmute you. Please go ahead.
Great. Thank you. Just a couple of very quick follow-ups. First of all, just on the right back of the contingent liability on Medlab. I mean, obviously BAU revenue has not come back as expected given what's happened with COVID, but I'm just curious that even excluding that effect, have you lost any business from Medlab as a result of the merger or as a result of it coming under ACL? I presume not much given the strength of Medlab versus your business in New South Wales.
Yeah, no, nothing material of note. Like, not dissimilar to the rest of the business. You know, GP numbers, access to GPs, referral volumes and stuff like that are still not back to where we'd expect them to be. You know, there's a little bit of churn, both within our business and any pathology business. No, there was no wholesale losses or nothing of note.
Great. All right. The second one is just, I guess with regard to competition with the three listed players in the Australian market, which make up a reasonable proportion of the total market. We've had two that have come out with reasonably similar messages and one that appears to be operating in a completely different marketplace. I'm just wondering if you can give any sort of generic comment on what might be taking place with that effectively change in market share for you and even for Sonic.
That's probably a question for Healius more than for us. I've been through today why we think we are performing. Looking at it from a positive point of view, we have got I mean, we're very stable now. We've been stable since IPO except for obviously the COVID response. Our teams are very aligned and work nationally and we've got a national lab information system that allows them to work nationally. You know, when we had a national COVID transition, COVID out transition plan, which we drove across the country all at the same time, and everyone knew what to do. We are very agile.
We are very focused on our customer service, our customers, and we're also very focused on making sure our shareholders get benefit, and we've, you know, managed capital effectively, et cetera. It's probably more of a question, not for us, but for, I think I've answered it, Rod, with what we've said today. It's probably more of a question for Healius than us.
For sure. That's fine. Thank you. The last question is just as, you know, the business is returning to normal, if you like, and we have less disruption, if we look at potentials for acquisition, I mean, obviously the marketplace in your mainstream clinical pathology is fairly focused, and Medlab was a fabulous acquisition, but there's not really another Medlab out there. Where do you see potential pockets that you could inorganically expand your business over time?
Yes, Rod, there are potential pockets that we can explore over time, that I'm not obviously gonna call out. Really the focus for us right now and for the next few months or next six months is really driving the performance from what we've already got over our fixed footprint, which we're really positive about. We will look for acquisitions at the right price and potentially in those pockets that you mentioned.
That's terrific. Thank you very much for your time.
Thanks, Rod. I think that's the last of our questions, and we're at time. If there are any questions you'd still like to raise, please feel free to email them through to us at investors@clinicallabs.com.au, and you'll find that email address on our ASX releases, and we'll answer where it's appropriate to do so. Thank you, Melinda and James, for your presentations, and thank you to all of our participants for attending and showing such an interest in ACL. We hope to see you at our next investor webinar later in the year. Goodbye. Thank you.
Thanks, Ellie. Bye, everybody.
Bye.