Morning, everyone, and thank you for joining our interim results presentation for the first half of the financial year, 2023. Before I hand you over to Maxine, I'd like to acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the land on which we gather today here at our new offices in Liberty Place. I'd like to pay our respects to their elders, past, present, and emerging. I'll pass you over to Maxine Jaquet, who's our CEO Elect, take you through the presentation. Afterwards, as usual, we'll reserve a little bit of time for Q&A at the end. Thank you, Maxine.
Thank you, Janet. Good morning, everyone. Given we're a month since the last trading update, there shouldn't be any surprises today. What I want to do is take you through the progress we've made over the last six months and what that means for the future of Healius. That is, how we are now positioned for sustainable and profitable growth. There are a few messages we want to leave you with today. First, it's been an extraordinary and volatile last three years. What the volume highs and lows have demonstrated is that having a national, and at scale, network in pathology delivers a high degree of operating leverage. It also shows how operationally the Healius team is able to flex capacity up and down when required. Secondly, we've done a lot in the last six months to position for BAU volume recovery.
We've reset the cost base, refocused on diagnostic businesses, and progressed our digital agenda. Thirdly, looking ahead, we're pursuing a strategy for growth under four pillars: operating leverage, service, insights, and people. You'll hear more about this in a moment, but in detail in a strategy day later in the year. We will continue to pursue disciplined and conservative capital management with the priority in the medium term being organic growth. As I said, it has been an extraordinary last three years given the swings in volume experienced by our pathology network. COVID test volumes went from as high as 46,500 tests per working day in H1 2022 to 6,500 in H1 2023. The EBITDA margins peaking at over 40% demonstrated the high degree of latent operating leverage in the pathology network.
COVID volume started to decline in September and October of 2022, we took immediate action. Using Laverty in New South Wales as an example, costs were pulled out in a structured way each month. When volumes dropped to a certain number of collects a day, this triggered a 2-week exit plan for a site. No redundancies were incurred as they were all COVID casuals. Obviously, the question for the whole sector is what's going to happen to BAU volumes in the medium term. The view of those in the sector is that catch-up is required for BAU volumes to revert to the long-term median trend. This chart here is analysis prepared by the peak body Australian Pathology. We at Healius share this view because pathology volumes and mix is determined by the clinical needs of the Australian population, which continue to trend upwards along demographic lines.
We are confident in this reversion and catch-up growth. It is our strategy to capture a disproportionate share of that recovery and enjoy the corresponding margin expansion. We've got a strategy in place to do this. Our current priorities are twofold: To leverage every aspect of our existing operations to drive organic growth, this is what I mean by operating leverage, and to invest in our service insights and people to drive sustainable above-market growth. In the shorter term, this includes leveraging networks we have in general pathology and imaging, increasing the modalities towards higher end, higher margin, and increasing clinician capacity. In the medium term, we will be growing into new clinical domains and testing technologies, and have in place an internal scientific advisory board to lead the introduction and commercialization of these new areas.
Our capital management framework is how we fund that strategy. We wanted to use this framework as something we can return to over time. For the short to medium term, our focus is clearly on organic growth. There are several levers to this. Increasing the size of our networks. In pathology, we'll see in the last 6 months, we are starting to increase our number of ACCs after a period of consolidation. Investing in modality capacity expansion, expanding the scope of our testing, including as assisted by AI, and changing our product and pricing mix. M&A is not a priority for us currently, but inorganic growth in the form of bolt-on acquisitions to increase the network are part of BAU and necessary for growth. We will not be paying an interim dividend as the focus is on debt reduction, especially given the more muted volumes of the last period.
Moving forward, growing sustainably is becoming more important. Sustainability and how we engage with all our stakeholders is fundamental to how we are perceived and valued as a high-quality organization. Whilst there is a lot of work happening across all these areas, including in the digital customer-facing initiatives, which we will address later, the main call-outs here for the half are: An 8% reduction in our Scope 1 and 2 emissions, despite already being a low emitter. Secondly, entering into a purchasing group for renewable energy under the agreement that was struck with QIC, with the sale of the day hospitals business. Here are the group results, which I won't dwell on given the recent trading update. The main call-outs from the half are: We reset the cost base in response to COVID volumes dropping off and anticipation of BAU recovery.
Aligned to the market, pathology is recovering, but at a slower rate than imaging, which is growing ahead of market. I'll go through more detail in the divisional slides. I want to go into more detail on what it means to say we have reset the cost base. Essentially, we have reduced our overall group costs to FY 2020 levels. Following this reset, we are 1% off this base. This is no mean feat, given that this is net of three years of inflation. Most importantly, over 55% of our labor and network costs are patient-facing in sites and collection centers, areas which are revenue generating and critical for growth.
The areas of the cost base we have targeted are right-sizing lab labor, significant procurement savings across consumables and a wide range of other categories, the rapid removal of COVID costs, which I've already described, and in addition, our management and corporate function costs. As you can see, while we have delivered the dollar savings set out in SIP, and this is being demonstrated at the EBITDA level, this hasn't translated yet into EBIT margin. We expect that the EBIT margins will be achieved once the industry has seen a return to long-term growth trends. As we saw earlier in the Pathology Australia analysis, the sector lost that level of growth over the last three years. At the full year, we will provide a more detailed update of SIP achievement and actual volumes against the original target. We expect that cost transformation will be a constant in our business.
Taking a closer look at pathology for the period, there are a few things I would like to call out here. The division continued to be clearly aligned to the group results given its contribution. The scale down of the cost base is clear in labor numbers. Following the reset, there will be 500 fewer FTEs in pathology than there were in 1H 2020. The network is positioned for growth according to our strategic pillars of operating leverage, service, insights, and people. On service, for example, there has been significant progress on the rollout of digital tools and experience for our patients, clinician referrers, and frontline staff. Agilex continues to show promising revenue growth in line with the global clinical trials market. I will go in a bit deeper into Agilex in a moment.
First, I want to take you through how we're positioning for growth in pathology. We are focused on sustainable organic growth. After a period of consolidating the tail of our ACC footprint that was less profitable, we are now expanding the network again. You can see from the middle row of this chart that Healius' ACC count increased versus the prior period. While our BAU revenue is off 1% compared to 1H 2020, the productivity of our ACC network has increased by 8% compared to the total market, which declined by 3%. This 11-point difference underscores our strategic positioning around sustainable and profitable revenue growth, as opposed to growth at all costs, which in this industry has never been a winning position beyond the short term. Beyond OCC productivity, we are pursuing the full range of growth levers in pathology.
These other levers include yield, customer experience, clinical domains, and contracting. Breaking these out into initiatives, there is a mix here of nearer and longer term priorities. In the nearer term, customer experience changes we're implementing mostly through the digital agenda are happening already or very close to being rolled out. Telehealth for GPs, e-referrals are here to stay and growing, so we've deployed a new Referrals Hub. This allows us to seamlessly obtain electronic referrals from medical centers for both pathology and radiology tests. We engage the patient directly through a simple SMS experience to help them get the test done at a time and place of their convenience. In terms of growing specialist referrals, we have already introduced some leading clinical programs, including surgical skin and the National Cervical Order programs.
In the new clinical domains and testing technologies, we've already announced the C2N exclusive partnership for Alzheimer's disease. There's more coming around the areas of highest disease burden. We're building on offering in emerging diagnostic testing areas. Turning to specialty pathology and clinical trials, I want to give you an update on Agilex. First, I wanna be transparent about Agilex. We remain confident in the investment case. The strategy and the financials continue to be promising. However, the start-up of a new facility and the scaling of operations is taking longer than planned.
The setting up of the new facility and getting it operational was impacted by COVID-related global supply chain issues. Fulfilling clinical trial demand was also impacted in the period by trial participants impacted by COVID. To support the ongoing growth, we have appointed a new CEO in January who is experienced in scaling up clinical trials businesses in Australia. We're making disciplined and necessary capacity investments such as the second lab in Adelaide and the new tox facility in Brisbane. We're doing all this because the upside for Healius here is above market returns and diversification within the diagnostics sector. The growth we anticipated remains in both Agilex and the global market in which it operates. For example, the growth rate of new phase one trials averages 10% per annum for the last five years.
The market remains strong, as does Agilex's position as a leading bioanalysis provider in Australia. Turning now to imaging. The focus for the last period has been investing for organic growth. That is already paying off. Excluding medical centers, imaging is up 10% versus the prior comparable period. January is trading up 11%. A AUD 39 million impairment of the medical centers segment is a necessary reset of the asset base and provides a better opportunity to compare to peers. The SIP initiatives realized in imaging were 50/50 cost and revenue, including a 100 FTE reduction in labor since 1H 2020, while increasing productivity in the form of exams per hour by over 10%. Now, focus is very much on accelerating this growth.
We are delighted to have a new divisional CEO, Dr. Phil Lucas, who has many years' experience in scaling imaging businesses, having been one of the founding partners of PRP Diagnostic Imaging. I'd like to give you a bit more flavor on how we're approaching growth in both the near and medium term. Our immediate focus is growing our radiologist sonographer coverage where there is demand and adding capacity in higher modalities such as MRI and PET, with 8 on order. In the medium term, we are looking to transition some of our community sites to full comprehensive sites, plus adding some greenfields. We have already deployed the best technology in PET CT in St Vincent's Northside. That is the GE Omni Legend. This machine is clinically better, with detectors that are 2 x as sensitive as other machines or halving scanning time.
With this growth, I am looking forward to greater recognition of imaging's contribution to the portfolio. As a pure diagnostics operator, we are sharing some of the assets and capabilities across pathology and imaging, particularly in the digital products like the Referrals Hub. Turning now to cash flow. The main call-out here is the cash flow conversion, which was above 100% for both reported and underlying lines. This shows a strong alignment of cash to revenue, as you would expect with Medicare paying after 3 days. COVID periods move things around with large invoices to state governments, the last period was back to normal in terms of billing. As you can see from the profile over time, AUD 20 million-AUD 25 million of maintenance CapEx each 6 months is the level for long-term sustainability for Healius' network post the medical center's disposal.
This ensures adequate investment and renewal of facilities and equipment. Turning now to debt management. The thing to note here is that our gearing is within covenants, but above our 1.7x-2x long-term target due to the temporary drop in EBITDA. Our focus remains disciplined cost control to minimize our debt position. I wanted also to give you an update on our digital agenda to underscore our commitment to sustainable organic growth. The purpose of our digital agenda is to build a competitive service model for our customers and generate efficiencies through standardization and automation. As we announced to the market previously, we are focused on building a platform of modular solutions that progressively replace our legacy systems. Where relevant, these solutions are shared across pathology and imaging, for example, in managing referrals, making bookings, and delivering results.
In the first half of FY 2023, there has been rapid progress on delivery. Everything we're doing in digital serves the strategy of increasing operating leverage, improving the customer experience for patients and referrers, improving the quality and speed of our clinical insights, and improving the experiences of our staff. All our new solutions have a nationally standardized design serving the needs of multiple brands, making them easier to maintain and change on an ongoing basis. Overall, the digital program is progressing as planned within budget. They say a picture tells a thousand words, which is why we've given you these images. On the left here is what an Ultra Screen looks like, which was our old laboratory information system. On the right is Healius' new lab portal. 2 out of 6 main pathology departments are now out of Ultra. They've got standardized workflows.
While the technology can be complicated, in this case, it's easy to see which one of these is ready for the future. The next version of our results portal for doctors is due for release next month. We are delighted to have such a great platform to support our referring doctors. The portal provides a rich experience and self-service with many features. Well, I think that is a good place to end the presentation. As you can see, despite the operating environment, management has taken strong action, focusing on managing the cost base whilst progressing the digital agenda and other initiatives to drive growth into the future. I'll now hand back to Janet, and Steve Humphries and I will take questions.
Thank you, Maxine. Can I please get the questions online?
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. We would appreciate it if you could limit to two questions and rejoin the queue if you have any follow-up questions. Your first question comes from David Low from JP Morgan. Please go ahead.
Thanks very much. Thank you for taking my question. Maybe you could start with just the commentary about the variable cost increase of only 1%, versus FY 2020. I guess what I'd like to understand is if we saw pathology recover rapidly, let's say numbers are up 10%, how much of that is gonna drop through to operating profits do you expect? I guess I'm asking how much is gonna be a variable cost and how much do you think you've locked down with fixed costs, please?
Thanks, David. Great question. We work off a base of about 80% in pathology is fixed and about 20% is variable, with the variable components being mainly the consumables. It really depends on how much volume increase you get. Small increments you can absorb in the fixed cost base, but if you do get a major step change in volume, there is obviously a bit of a step-up in terms of what's required in terms of other areas.
Would it be safe to assume that given demand, BAU's been below expectations, both yours and industry, that there is a bit of capacity in the structure at the moment? If we saw a normal recovery, it wouldn't require much in the way of additional fixed costs?
Yeah, that's it that's exactly right, David.
I'm gonna squeeze in another question. I think that was one topic. Just on the doctor portal in the next few months. I mean, it looks like a great improvement in the technology, but historically, you know, change is not something that's welcomed by doctors all the time. Just wondering, do you see much risk with this rollout, that it's the sort of thing that can trigger your customers to leave, or alternatively, there's an opportunity to bring in more doctors with a new system? What's your expectation?
Look, our expectation is. Look, it's a significant step forward from where we are today. It also has additional features which we don't offer. It's not just the visual output in terms of what it looks like, but there are many other features which we know are desired. We've done a lot of user testing with our clinical group, and a lot of the design work has been done in consultation with that clinical referring group. Look, we're pretty confident that it will be very well received.
Great. Thank you very much.
Thank you. Your next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Good morning, Maxine. Good morning, Janet. Thank you for taking my questions. I'm looking at that slide 12, which I found quite interesting, and well done increasing revenue per collection center. Can you provide a little bit more color on what the expansion plans for collection centers might be in the next 6-12 months in terms of how many you might be adding? Then also, you know, what would a target revenue per center look like, if there's anything you can share with us?
Yeah. Thanks, Lyanne. Great question. Look, I think the first thing to say is, as you can see, our strategy is based on profitable expansion. We would say the market has grown less effectively in the last period. For us, there is no target in terms of what we would like to add. We do have very clear areas where we call white space in terms of where we think we would like to be, whether that's in terms of independence or we think we're under-penetrated in terms of market share, looking at SA2 levels. No sort of target, 'cause it really does obviously come down to what you have to pay for that growth.
Independence can be a lot less expensive in terms of the rent outlay. They do take more time to ramp up. For us and what we've added, most of those have been profitable wins against incumbent operators. Yeah.
Okay, thank you. In terms of the second question, what are you seeing, from a honing, sorry, a COVID perspective in terms of, you know, does that still drag on revenues? Are you seeing the average number of tests per patient, you know, start to reduce over the course of the half, or is it still quite elevated?
No, it is, it is actually still quite elevated. We haven't seen a change. It's still at the same levels of where it was. Look, there are ways in which we can, when we can offset this. There are some initiatives that we discussing with the Department of Health at the moment, which may assist around how we better manage clinical disease management. We will just have to see how those play out. Look, we think it is temporary, but it really is related to the volume of activity with GPs. As people go to the GP and more frequently, they're more likely to order in smaller increments.
We'll just have to see how that plays out.
Okay. Thank you very much.
Thank you. Your next question comes from David Bailey from Macquarie. Please go ahead.
Yeah, thanks. Good morning. Just on slide 10, just wanna understand exactly what we're sort of talking about here. Is AUD 824-AUD 766 a cost base we should be expecting for the second half, or is that something you're expecting to be realized once some additional initiatives have been completed?
Look, the H 123 after cost reset, that is, either costs that we have taken out to date or they are costs which are certain to come out because they are people with.
Yeah.
identified people or contracts signed with suppliers. That, that's really the base from which we're working with, now.
Is it more of a FY 2024 run rate then, as opposed to, second half 2023?
Yes. Yep.
Yeah. Okay. Just in terms of timings on some of the VOIS stuff, by 20, I mean, when should we be thinking about, you know, that being completed, relative to expectations?
If you, if you look at the overall slide where we've got the different modules. In terms of the lab cut over, really by the end of this calendar year, we should have all modules cut over. We've got the results portal, which is going out in market in March. Collections portal for our collection sites is currently being rolled out in Queensland and will be nationally rolled out. Look over the progressive rollout over the next sort of 12 months. I can't see it being much more than sort of 12 months for the bulk of it from here.
Can you just remind us the the benefits that we've talked to on the back of this?
Yes.
change from a financial perspective?
Yeah. There, it was AUD 10 million-AUD 20 million in benefits, I think were part of the original capital envelope when that was out. Look, that comes in the form of when we're retiring the legacy system of Ultra, there's a sort of depreciation charge that sits there, plus doubling up of resources. It's mainly just in the cost of carrying two systems.
That's great. Thanks.
Thank you. Your next question comes from Mathieu Chevrier from Citi. Please go ahead.
Yeah, good morning, Maxine. Thanks for taking my question. My first one was just on your long-term EBIT margin target in Path. In imaging, you know, you were previously targeting margin improvements of around 300 basis points over time. Do you think that sort of target is still achievable once you return to, I guess, a normal run rate?
Thanks, Mathieu. Look, it certainly is. You know, the greatest demonstration of that is when you, when you look at what happened with with COVID volumes, even when we were getting an additional 10,000 tests a day and you adjust for the incremental fee coming through from COVID, you were still getting margins of around, you know, 18%, right? That was a net about 5,000 tests a working day on the system. Absolutely, we expect as volume recovers, those margins are achievable. In terms of imaging, my one call-out, which I have mentioned before, is the medical center segment. That continues to be a drag on the imaging performance.
Look, at the EBITDA line, it's not so noticeable, but when you get down to EBIT, it really is. Because you've essentially got 142 sites. And, you know, those medical center sites which make up a chunk of that portfolio, just have a really poor revenue per site. Those contracts have still got a few years to run. Imaging will be held back until we can resolve those medical center sites. Look, looking to boost our community sites in imaging. Some of them today are not fully comprehensive, and we see a big upside in looking at that for the community segment. Sans the medical centers, the margins and the prospect around those for imaging look incredibly strong.
Thank you. Just in terms of being able to attract employees in the imaging space, I mean, some of your competitors have highlighted some shortages of staff, not only radiologists. I see that you mentioned that you have a new employment model that's attractive for radiologists. Can you give us a sense of what sort of changes you've made and what sort of The labor cost pressures you're seeing in that division?
A great question. The change in model has been really marked for us. Previously We're a facilities and services provider, and it was a revenue share agreement. Which is okay for more established radiologists, but it limits your pipeline in terms of getting younger radiologists. And it also limits the work that is done in the hospital segment. They're two pretty key elements of building up a business which has got a comprehensive portfolio and a good mix of hospital and community work. It's been pretty marked, and so we're not quoting numbers in terms of what our radiologists are and how many we've added.
In the last, I think in the last six months, it's been something like 20, and it's been incredibly well-received. We're really happy with that. Having said that though, it is correct that getting sonographer capacity is challenging. There are a lot of areas in our business where if we could get better coverage, we've got waiting lists that we could fulfill. It's a, I know it's not unique to us, but it is certainly a challenge, yeah.
Great. Thanks very much.
Thank you. Your next question comes from Andrew Goodsall from MST Marquee. Please go ahead.
Oh, yes. Good morning, and thanks very much for taking my questions. First one, just looking at the sort of last two months of the year, it does look like you were able to get your cost down about 15%, relative to the overall six months. Just trying to understand how with your SIP and the 500 staff exiting, how that, you know, what sort of percentage if you've got a sense of what percentage we might see that fall in the second half.
I think the FTEs versus the H 1 2020 number. Look, we've got additional heads that are coming out, which we haven't given a headcount number for this second half. You're right, we did take out a lot of costs in, a lot of people costs in November, December. It was continuing to January, February, and will continue for the next couple of months.
Would that 15% be, or another 15% be reasonable, do you think? Or just ballpark. This is, I'm just looking at run rates.
Yeah. Yeah, I think that's right. Yep.
Okay. Okay. That's net including SIP, I guess and everything else?
Yes. Yes. Look, I mean, we've had to do more on the cost side with the SIP piece. I mean, there are a couple of initiatives in there that we hadn't originally planned for. Most of them are what was originally planned. I've said before, of areas which were not appropriate given the lab work that we had with COVID, and now that that's sort of settled, that's where that work's mainly been focused on is in those original areas. The spans and layers work that we've just done around looking at, okay, we've got two businesses now, how do we consolidate across pathology and imaging? We do have support costs which cover both areas and trying to bring all those costs together as one.
Okay. Just a, I guess, clarification or any comments you can make on the second half D&A, because obviously you've got the movement in the impairment of leased assets, and you've got an asset held for sale that, I guess, have now exited. So just trying to get a sense of where that might land relative to the first half.
Andrew, it's down. It will be down fractionally, in the second half due to that, the imaging, but up a little bit, you know. You know, you've got offsetting up a little bit with the ACCs we've opened in the first half. I've got us at about 133 for the second half all up. Not much different really.
Yeah, just a bit of movement down.
Yeah, a small bit.
Yes. Okay.
Thank you. Your next question comes from Craig Wong-Pan from Royal Bank of Canada. Please go ahead.
Thanks. Just wanted to understand about restructuring costs. You incurred AUD 3.8 million in the half. It sounds like there's still a bit of restructuring continuing into the second half. Just wondering if you could provide any comments about what we might expect for restructuring costs.
Yeah. Look, the first half, the smaller proportion was actually restructuring costs. There was a contractual separation agreement for Malcolm is covered in that first half number, which is the bulk of that number, which we have to recognize upfront. For the second half, we're talking about AUD 1 million-AUD 2 million in restructuring costs.
Okay. Okay. It's not too significant. Just a second question around CapEx. Given you've got some new investment going into imaging, some other initiatives too, could you provide any expectations for second half CapEx?
Uh, look-
TC.
Maximum, same as the first half. It might be a little bit less, we'll just have to see how some of the initiatives come out.
Okay, thank you.
Thanks, guys. I think we're gonna close the call now. Apologies if there's anybody else on the line who wants to ask a question, but please give me a bell after the call. Thank you all for attending today.