Thank you for standing by, and welcome to the Healius Limited FY 2022 results call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Janet Payne, Group Executive, Corporate Affairs. Please go ahead.
Thank you very much, and good morning, all. Thank you for joining our results call today. I'd like, first of all, to acknowledge the Cammeraygal people of the Eora nation as the traditional custodians of the land on which we gather today, and pay our respects to their elders past, present, and emerging. I have with me our presenters, Dr. Malcolm Parmenter, our CEO and MD, and Maxine Jaquet, our CFO and COO. We will try and keep the presentation a little tighter today, so we don't go over the allotted hour. The divisional slides are in the deck, but we are taking them as read, and we will only cover the highlights today. As always, corporate affairs is available to answer any detailed questions after the call. With that, I'll hand over to Malcolm. Thank you.
Thank you, Janet. Good morning, everybody, and welcome to the Healius FY 2022 results presentation. Thanks to all of you for joining us. I'll take you through a few key slides on the FY 2022 performance, trading update, introduce you to some of our consumer innovations and some new announcements. Max will also update you on capital management, cost control, and the sustainable improvement program. As Janet mentioned, we're not going to go through the detailed divisional performances, but you can read these for yourselves. They're in the appendices. If you turn to slide three, and looking at our top level results, you can see it was a record year for the Healius Group, one in which we delivered a 22% lift in revenue, with EBIT up 85% and NPAT up over 100%.
First of all, I'd like to acknowledge another huge effort from our people and say a big thank you to them for their outstanding work in the delivery of this record result. What they have accomplished this year is simply extraordinary, except they did it the year before as well. Let me highlight some of the key points that the Healius team has achieved this year. We've been able to scale up in ways we never thought possible, as you can see from these numbers. In fact, we handled 40% more episodes through our pathology laboratories in FY 2022 than in the preceding 12 months, which was itself an extraordinary year. While our share of COVID-19 testing was strong, we're also pleased with the level of non-COVID or underlying pathology revenue.
Our commercial segment grew strongly in the year, up nearly 8%, as we focused on diversification and higher margin growth. In addition, our market share in underlying bulk bill revenue was stable. Flexing systems up is one part of the equation. Flexing down when volumes reduce is just as important. I'm pleased to say that our ability to flex down in the second half of the year was as impressive as the scale up was in the first half. In the second half, we achieved 29% EBITDA margins in the pathology division, and this is the same as the FY 2021 margins. It showed our ability to rapidly pull costs out of the business when we needed to. The strong second half also underscores the success of our footprint optimization initiative for our ACCs.
Our focus to date has not been on the total number of approved collection centers, as we've outlined previously, nor even on total revenue. It's been about improving the returns we are getting from our network and making sure the revenue we achieve has an adequate margin. We've compared our underlying pathology revenue and footprint to pre-pandemic levels, and most pleasingly, we have delivered nearly 11% more revenue per ACC than in FY 2019. With a higher performing network, we now look to selectively grow this footprint. Turning to the imaging division, the well-publicized shortage of GPs in this country has impacted our imaging services at sites within the former Healius medical centers. This channel is unique to the Healius imaging division, and affects the comparability of our results.
Despite that, our financial performance in imaging was ahead of the market, and that's in spite of the fact that through most of FY 2022, imaging was jostled by a number of well-documented factors, including COVID impacts, such as restrictions on surgery in hospitals and the apparent reluctance of patients to access healthcare out of fear of contagion. Also, the extra costs associated with offering services during COVID, including staff shortages and sick leave, the difficulty in rapidly flexing frontline labor in a multi-site footprint, and the countrywide shortage of radiologists. After a tough period earlier in the year, the imaging division is improving with a good performance in Queensland in the second half of FY 2022 and pleasing growth in FY 2023, where revenue per day has been accelerating from mid-July onwards.
We're very focused on growth in the next 18 months, and Lumus is well placed for the likely rebound in demand from a backlog in diagnosis and surgery with a strong hospital presence. Our previous CEO in the imaging division, Dean Lewsam, has departed and we are well down the path of appointing a radiologist to lead the division. In the meantime, I'll be the interim imaging CEO as we continue the sustainable improvement program, the rollout of our digital applications, and we target small to medium-sized M&A opportunities. Across the whole Healius business, we've had a huge year in terms of the delivery of the sustainable improvement program, the digital agenda, with much of it towards the end of the year.
Our SIP implementation has grown from 25% at the Investor Day in May to 45% by the end of the year in terms of run rate benefits. These back-ended initiatives are not showing up in the margins in the year, but will do so in FY 2023. In particular, the Healius Digital program is delivering great results, but more about that later. Last, but by no means least, we have rewarded shareholders with a growing annual dividend and nearly AUD 140 million given back in two share buyback programs in the financial year. If you move on to slide four and our trading update. Now, we're not providing guidance at this stage, given the unpredictability of COVID and its impact on the return of regular testing in healthcare.
Our growth for July and August against last year is also not particularly informative as it reflects the timing of lockdowns and the strength or weakness of the prior period results as much as the current results. In terms of trends, if you look at where we've been trading this financial year, imaging is showing encouraging signs of improvement, as I mentioned before. BAU pathology is also coming back, while COVID seems to have settled at around 10- 12 thousand per working day over the last two months. Now, it's impossible to say where COVID testing will eventually end up, but it will continue for the foreseeable future. Although COVID has fallen out of the headlines in recent times, its clinical implications remain a concern for doctors, especially for their vulnerable patients.
This concern will drive PCR testing forward, which is likely to range for us between seven and 14,000 per working day, which is over and above our regular testing as novel variants come and go. In terms of a bounce back in non-COVID testing, the prevalence of COVID and other respiratory viruses has resulted in some delay. However, the underlying drivers are still strong, and growth is expected to revert to the long-term trend. There will also be a period of catch-up for the known and worrying levels of under-diagnosis in the system over the past three years. Now, if we move on to slide five, turning to some interesting developments in the specialty and higher margin sectors of our business. As you're aware, genomics and vet pathology are growth areas we are targeting.
Today, we are announcing an exciting partnership with a U.S. company, C2N Diagnostics, which is a leading global provider of brain health laboratory services. We will soon be offering their high-quality blood test for cognitive impairment. It's a test for a protein that when excluded largely eliminates Alzheimer's as a potential diagnosis. This can provide timely diagnosis for Australians with memory or other cognitive problems and help in the evaluation of Alzheimer's disease. In the high margin pathology space, as you're aware, we've also moved into clinical trials, an area most leading pathology providers around the world operate in. Clinical trials pathology is proving to be a good market with strong long-term tailwinds. We've seen that in the growth of Agilex with their year-on-year revenues up 52% and their pipeline up 80%.
Our current focus is investing in and growing Agilex's Australian operations, and we expect it to be a growth channel for us going forward. In the imaging space, Lumus Imaging has won another substantial hospital contract, with this contract covering the Hunter New England Local Hospital District. The contract is to provide reporting along with some on-site services for 32 hospitals across this region, including Tamworth, Armidale and Moree. Together with our Northern New South Wales contract, which we already had, Lumus Imaging now provides reporting services for almost all public hospitals in New South Wales, north of Newcastle. This contract will run for at least three years and will be a good addition to Lumus' bottom line this year.
On the AI front, we have applied AI-assisted reporting to around 300,000 chest X-rays using Qure.ai technology as part of the immigration contract we have through Bupa. Qure.ai has proved a useful support tool, helping improve the radiologist's efficiency and confidence as a secondary capture tool. We're now working with Sydney Uni to assess the practical implications of this program. Now on to slide six and customer services. It's our aim to permanently change for the better the way consumers interact with us as a healthcare provider. This is becoming important for competitive differentiation, and I believe consumers will increasingly vote with their feet towards providers who can offer not only clinical quality but a great experience.
I know most of you probably don't want to hear much about COVID these days, but for us, the pandemic has proved the old adage of not wasting a crisis, as Healius led the way with a number of COVID digital innovations. We were the first to market in Australia with a commercial travel COVID testing solution, helping consumers navigate the ever-changing landscape of COVID travel testing. We were rewarded for this with a more than 40% share of this market. We were also first with paperless COVID drive-through testing, increasing convenience and reducing the risk of both COVID transmission errors and human errors. We had our digital solution out within a week of the Delta surge in Southwest Sydney and out to all New South Wales COVID testing sites within the month.
During this year, we've also introduced a range of key consumer innovations in business as usual operations. These include e-referrals for both pathology and imaging, a digital collections portal, and a multi-channel voice of customer program across our network. In the year, we've enabled 1,835 collection centers for online connectivity and trained 800 collectors in the use of those new digital tools. In imaging, we have enabled 122 imaging centers to use our electronic booking system, and we've trained 345 clerical staff in its use. We have onboarded numerous referring medical practices. We've also deployed a voice of customer program across more than 2,000 pathology sites this year, with feedback embedded into management performance metrics. This will support a rapid cycle of continuous improvement on customer experience across our entire network.
We're moving at pace with a lot more exciting innovations in the pipeline for FY 2023. On to slide seven and sustainability. This has been a focus over the last 18 months or so, and we have set our sustainability aspirations and identified our five immediate priorities from the vast array of matters that sit in the sustainability ecosystem. The S of ESG, including our people and our customers, is central to our success as an organization. As a service company, our success is underpinned by our ability to attract and retain the right talent, putting our people front and center with the right tools and support to deliver the best possible outcomes. Our sustainability strategy is aligned with our internal people strategy. This aims to create a strong, collaborative, performance-driven culture with a clear sense of belonging.
We're looking to enhance employee recognition and benefits to improve training and career pathways, and to foster diversity and inclusion. To this end, we've signed up to both the HESTA 40:40 Vision and the Minderoo Foundation's Generation One Indigenous Employment Index. For our customers, both referrers and patients, you will continue to hear about all our exciting initiatives under the Healius Digital program. Turning to the ESG space, we have baselined our scope one and two emissions over the last two years, with FY 2022 at 32,000 tons of carbon equivalent emissions. We aim to be carbon neutral by FY 2026, with 75% of the program identified. I'm sure further reductions will be identified as electric cars and an array of green initiatives become more readily and available and more cost-effective in Australia.
Ethical sourcing is also a key priority, where we have an ongoing review of our supply chain, especially within known risk areas such as PPE manufacturers. To ensure we embed sustainability into the group, we've set up the necessary governance structures with a dedicated sustainability committee reporting to the Healius board and sustainability KPIs within our remuneration framework. Now, our sustainability report will be out in September, very shortly, along with our annual report. Now, at this point, let me hand over to Max, who will talk more about our balance sheet, our capital management, more about our sustainable improvement program, and digital initiatives. Thank you, Max.
Good morning, everyone, and thank you, Malcolm. First up, I wanted to call out that this year has demonstrated the benefits of having a simplified portfolio that generates significant cash. We're pleased to announce record gross cash flow of AUD 677 million and free cash flow of over AUD 530 million, of which 45% was returned to shareholders. This has also meant that we can invest in digital, greenfields, and equipment to underpin sustained growth. Along with investing in growth, we intend to maintain a conservative balance sheet and remain committed to our target gearing ratio of 1.7x to 2.2x. We're also creating space for medium-sized bolt-on acquisitions in imaging, where we see these types of deals as value accretive. On the topic of transactions, we're pleased with the response to date for the sale of the Montserrat business.
Turning to cost management. Another key call-out for the year has been our management of the cost base. As you can see, there's obvious leverage in our business, but we've done more than that. Despite pathology volumes being 40% higher this year, the pathology FTE count was flat. As Malcolm said, equally important is our ability to flex down as COVID volumes normalized through the year. This resulted in second half margins the same as last year. A lot of what we're doing in SIP is allowing us to more closely manage labor to demand. The other call-out is our performance in managing consumables. Market price increases were offset by our sourcing and procurement initiatives, despite stopping pooling in December in response to COVID positivity rates. We were able to reduce consumable spend as a proportion of revenue.
Looking forward into FY 2023, we're continuing to manage inflation of our input costs. In terms of consumables, our SIP program is improving both sourcing and demand management to continue to offset any price increases. In terms of labor, most of our staff are on enterprise agreements, and most of these agreements are not being renewed until FY 2024 and FY 2025. We're a people business and look forward to continuing to manage our labor costs with our staff. Turning to SIP phase II. Our phase II of our SIP program continues to deliver revenue and cost initiatives to expand our margins in pathology and imaging. Since the Investor Day in May, we have been able to accelerate some initiatives that were previously on hold due to COVID working conditions.
This has meant that we've completed AUD 30 million worth of the initiatives, representing 45% of the original target value. We've made progress on various initiatives, including ACC network optimization, back office and lab process reengineering, tools to be better able to manage labor to demand, and procurement. In FY 2023, much of the benefit profile will be underpinned by the digital work that is underway. Our implementation costs for the program continue to track lower than originally forecast. We remain on track to exit FY 2023 at the target margin, assuming the recovery in BAU volumes in the second half of the year. Turning to digital. The execution in digital has been a real success story for the year. As previously discussed, our digital agenda has two types of work: digitization of customer-facing workflows and cut over of lab instruments.
I'm not going into the detail of the customer-facing workflows, other than to say these are products and services that we will continue to bring to the market rapidly. Malcolm has already gone to some of the innovations here. The second part of our agenda is the steady pace cut over of lab instruments. We have progressed with our integration of the new instrument manager to our lab systems. This has involved cutting over a regional lab first and running the old and new systems in parallel to ensure operational integrity as we go through this process across the rest of the network. We're now configuring the first of four major labs to the new instrument manager. This will make it easier for our clinical staff to manage ongoing changes to analyzers and also to increase automated validation of test results.
You can see what else is coming up in the agenda in FY 2023, and again, we are confident we can continue to manage within our cost envelope. Turning to growth. Underpinning this performance improvement is a capability build in both digital and commercial. This will allow us to grow beyond the market and, importantly, deliver double-digit ROIC. As we said at the Investor Day, we're a diagnostics business and we see growth in both pathology and imaging businesses. In particular, there are opportunities to grow our ACC network now that it is more profitable, and also to grow our national imaging footprint. We see this growth being realized through a combination of greenfields, contract wins, and bolt-on acquisitions. Clinical domains will be a focus for us as Healius now has a set of capabilities in diagnostic insights and bioanalysis that spans R&D to screening and diagnosis to therapy.
We are focusing on the highest burden disease groups, including cancer, cardiovascular disease, musculoskeletal disease, mental health, and metabolic conditions. Specialty pathology areas promise double-digit revenue growth, as do innovations in imaging modalities and technology. We will build, buy, and partner as appropriate to realize the growth from these clinical domains. We are currently making investments in time and modest amounts of capital to pursue these opportunities. In terms of acquisitive growth, we've got a good track record here.
Even in the challenging market for imaging this year, the Axis Diagnostics acquisition has outperformed for us. A lot of recent work on shaping the portfolio and margin improvement is setting up a platform for growth. This platform is simpler, leaner, and offers more optionality than what we had previously. I'll hand back to Malcolm now, who will conclude the presentation by describing how this has fundamentally improved the overall business over the last three years. Thanks.
Thanks, Max. Slide 13. I'd like to finish with a snapshot of where Healius stands today compared with FY 2019. This is to reinforce the achievements that we've made over and above the delivery of 13 million COVID-19 tests. As a company, Healius is in a far better position than it was in FY 2019, with a much simpler portfolio, having divested medical centers in IVF. Our return on invested capital has grown, and through our SIP program, our margins are expanding to competitive levels. We have far less capital intensity in our business, with greater free cash flow, producing a fortified balance sheet and strong shareholder returns. With this strength, we will deliver growth in our diagnostics businesses, realized through personalized insights and superior customer experience.
We have a broader range of growth options now than in FY 2019, including exciting innovations in genomics, specialty pathology, precision medicine, clinical trials, and AI. Our growth thesis is supported by, firstly, the increasing importance of screening and diagnosis in reducing downstream healthcare costs. Also, by the convergence of pathology and radiology in the diagnosis and treatment of disease, and by the growing consumer choice in healthcare.
Our capital allocation, our group-wide Sustainable Improvement Program, and our Healius Digital programs demonstrate our commitment to long-term sustainable growth in the diagnostic sector. Finally, on slide 14, we've highlighted the achievements in the year. I'll let you read them yourself, but our team has delivered outstanding performance across all operating metrics this year and executed on key initiatives in order to position us for growth in FY 2023 and beyond. Thank you, everyone, for listening, and I'll hand back to the moderator for questions.
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. Your first question comes from David Low from JP Morgan. Please go ahead.
Thanks very much. Perhaps if we could start with the SIP program. Just to make sure I understand it, and I know we're not getting guidance elsewhere, but just to understand the savings. AUD 30 million has been delivered. 67 is the target exit rate. That would imply sort of closer to AUD 50 million of savings coming through in the current financial year. Is that the right way to think about it?
Yeah. In terms of in-year savings, that's a fair assessment, David.
Okay, great. Thank you. If we think through margins, I'm gonna focus on the pathology division, given its dominance. You've come out of the second half with, you know, margins back where they were in FY 2021, but still presumably boosted by COVID testing. Let's assume we see a return to BAU. I mean, how should we think about margins as COVID testing contribution eases off, but cost savings come through? You know, all other things being equal, can this margin be maintained?
Look, it's a great question, and the answer is it depends on what overall volumes are, right? It depends where BAU volumes sit and COVID volumes. If we assumed that we had BAU volumes returning to a normal growth level, and we'd set for us an overall growth target, you will see from those 2019 uplift, and we haven't had that growth in the last few years. Look, it depends on where growth gets to in BAU in that second half and COVID testing. If we said COVID testing hovers somewhere between 5,000-10,000 tests on average for the year, and then we get a normal recovery in BAU, we will definitely see margins sitting at that 13%-14%.
Okay. That's an EBIT margin then?
The margin, correct.
Yes. Lovely. Look, thank you very much for that. I'll go back in the queue.
Thank you. Your next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Yeah, good morning, Malcolm. Good morning, Maxine. Can you maybe speak a little bit about the base business? You know, you're saying that you're seeing some encouraging growth early in this financial year. Can you give us an indication of, you know, which geographies might be doing better? You know, which of your segments might be performing better than others?
Yeah, thanks, Lyanne. Look, we've seen base business continue that trend of moving inversely to COVID numbers in the community, and to a large extent, to how much COVID is actually in the news in terms of where base business sits. You know, with COVID numbers being higher in early July, non-COVID revenue was lower across all of our divisions and then recovering, and now reasonably strongly into August as it sort of disappears from the media headlines. Look, I think you know, it, I think the fear of COVID is probably gradually diminishing.
I think part of that base business or the drivers for that base business, one of the negatives there has been the reluctance of people, particularly people who consider themselves vulnerable to access healthcare and to delay things that they consider to be elective. It's that kind of swings and roundabouts. You know what, it's hard to know exactly where COVID goes. You know, within our, the numbers of COVID tests that we're doing at the moment, our positivity rate there is still about 12%-15% of COVID tests that we're doing in our labs. Despite the fact that it's largely disappeared from the commentary, albeit, you know, talking about reducing restrictions further, but otherwise disappeared from the commentary, there's still quite a bit of COVID around. Despite that, we're seeing that business as usual, the non-COVID revenues start to recover.
Okay. If you could touch on imaging just a little bit there. You know, you also mentioned that growth in July and August was encouraging. Can you provide a bit of color? Are you seeing, I guess, the imaging mix return to, I guess, more normal levels rather than focus on higher modality imaging?
Yeah. Look, yes, we're seeing both of those things. Volume's coming up and average fee increasing into August as more of the higher modality procedures are requested and ordered. We've also, over that period of time, been progressively rolling out our e-referral system which is driving some more volume into that, and we expect that trend to continue across that imaging business as we do that.
Okay. Thank you very much.
Thank you. Your next question comes from Andrew Goodsall from MST Marquee. Please go ahead.
Oh, thanks very much for taking my questions. Just starting with Agilex. Just trying to understand, it was up 30% on the five months under your ownership, but for the full year, up 52%. Should I read that as a slowing? Just any color you can give on, you know, what was happening at EBIT as well.
I think that's really only just on a larger base, Andrew, is where that changes.
Yeah.
You know, it's a relatively small business that's growing quite quickly. I don't think the trend on growth has slowed at all or changed from where it is, and the pipeline is still very strong.
Okay. Just the half on half comparables.
Yeah.
Got it. In terms of EBIT there, just, was that in line with where you would have expected, I think, at the time the acquisition, EBITDA of 14-16 was the number given?
Yeah, 14-16, and that was a calendar year number. Look, we are still expecting the EBIT numbers to come through in this, in the FY 2023 year. There's definitely been some equipment delays and a couple of reagent delays as well in terms of getting that volume. The pipeline is incredibly strong, and the revenue's incredibly strong. For us, the challenge is how do we deliver against that demand. You know, still very confident in both the margins and also the growth in the business.
Just going back to trading or more generally, and the margins that you've talked about. Just trying to get a feel for where you exited the year in that Q4. It seems if we look at the test rates per day now and, I guess in February- April, you'd said they were sort of around 15,000 tests per day. Yeah, just what that meant in terms of those margins. Did it move them towards the pathology margins that you gave in your, well, not guidance, but your indicative margin, Maxine?
Yeah. Look, the June EBIT numbers were actually pretty strong. You'll all see the difference between the May and the June numbers. The final numbers, sorry, to get to the June EBIT numbers for pathology. They were probably a bit higher than what I'm foreshadowing. Look, it really comes down to, we're very confident on the cost savings, and the variables which are unknown are what is the rate of BAU recovery and what is the level of COVID. That is hard to forecast.
When we talk about normal BAU, if we have a normal BAU trading in that second half of this financial year, and we either have that or we have slightly lower trading and we have a level of COVID testing, then we'll see margins probably sitting above 14%. It just depends on where those two variables go. Because in BAU testing, it's also a function of mix, which obviously goes to fee. So that has a fairly material swing factor in terms of bottom line impact.
Terrific. Final one for me, just on M&A capacity. Obviously you've got a sale process underway which is gonna cash you up more. What's your sort of appetite for, you know, where you might take your debt levels after that. Would you be happy to sort of, you know, have the balance sheet fully working?
Well, it depends what we get in terms of the sale proceeds. I mean, we have a sort of a target. We would like to redeploy that capital into imaging. We do see a pipeline of accretive acquisitions, which we think will bolster both our mix and our network coverage in imaging. That's where we'd like to deploy that capital. We are sticking to those gearing ratios at this point in time cause we think that's prudent.
Current ratios or
Target. We said 1.7x to 2.2x.
Got it. Okay. Terrific.
Thank you. Your next question comes from David Bailey from Macquarie. Please go ahead.
Yeah, thanks. Morning, everyone. Maxine, you kinda hit on one of my questions around that, the implied month of June. Looks like about AUD 19 million of EBIT for that month. Just wanted to confirm that your, you know, that your commentary is sort of foreshadowing a bit of a step down from that level under that sort of BAU plus COVID testing scenario.
Yeah. Look, I think it was fairly what we'd expect to see for FY 2023 in terms of normal trading. It's not a bad base to use for the FY 2023 months, but you know, there's a lot to be played out yet in the year.
Just confirming the earlier commentary that there's incremental benefits of about AUD 50 million under SIP.
That's right. Yep.
Yeah. For fiscal 2024, the digital initiatives, the spend's on track and just confirming that's AUD 15-AUD 26 outside the SIP, over and above fiscal-
Look, that's exactly right. We talked about benefits from having a consolidated network of labs at that period of time, and also not running dual systems. Right now we're obviously carrying the cost of running Ultra and the new set of systems so that, you know, comes at a cost, so we won't have that. Then we also think there are some optimizations that we can make on a small number of tests across the labs. That's what forms that benefit. You know, obviously you need to get to the end of the program to deliver those benefits, as we've said previously.
That's great. Thanks very much.
Thank you. Your next question comes from Gretel Janu from Credit Suisse. Please go ahead.
Thanks. Good morning, all. Just firstly, in terms of COVID testing, you've given that range of 7,000-14,000 tests per working day likely to continue. I just trying to understand where you get confidence in that range that you've provided there, 'cause if I recall, at peak testing, you were doing roughly 40,000 tests, so you're assuming more than 20% plus of peak volumes continuing. Your peer last week came out saying they expect volumes to come back down to 10%-20% of peaks. Why is your range a bit higher?
Look, it actually isn't higher. Our peak testing in January of this year got to north of 70,000 per working day. The peak is higher. We probably did have a higher share of the COVID testing than I think Sonic did, compared to the rest of our market share. That might have had something to do with our geographical footprint. I'm not really sure why that was. We were probably always doing more of the COVID testing.
Understood. Just in terms of outlook for COVID test reimbursement and price.
Look, as you know, the fee is to the 30th of September, and there's a dialogue going on at the moment. We're not really sure exactly how that will play out over that period of time, so we don't really know the answer to that right at this point in time.
If it was reduced, would you then look to close some of the centers, drive-through centers and things like that?
Yeah, look, I think it would depend how much it was reduced in terms of that. I think all providers would probably start to close some of their drive-through collection centers if it goes down much more than where it currently is.
At the current price, the sentiment space at this point.
Yeah.
Is that right?
Yeah. If it goes much below where it currently is, you know, so the rebate's AUD 72 something, I think, for a COVID test. And then there's a respiratory virus panel on top of that. Look, it just depends where it goes. You know, it's the talks with the Federal Health Department and the government have been very productive so far, and actively engaged in, you know, what's appropriate for this.
Understood. Thanks very much.
Thank you. Your next question comes from Saul Hadassin from Barrenjoey. Please go ahead.
Yeah, thanks, Malcolm. Thanks, Maxine. Just two questions from me. Malcolm, the first one may be for you. In 2018, when Healius raised capital, part of that was certainly to acquire the Montserrat business. Can you talk about what's changed in your mind as it relates to the outlook for that business and that industry, and hence why the sale process is underway?
Yeah, look, it's a good question, Saul. Look, I don't think anything's changed in terms of the outlook for that industry. I think that's been shown through the sale process in terms of the amount of interest there is in acquiring Montserrat. There's no question in sort of most of the participants within that industry around where that is. I think one of the things that we've learned over time is, you know, we've been in day hospitals for something like, or at least primary has, for more than 20 years over that period of time. As we've gotten bigger, you know, we've gone into larger facilities as a diagnostics provider.
We obviously are, you know, starting to compete with some of the organizations that we provide services to. That's one part of it. I think, you know, if we look to growing this substantially, then that becomes a bigger problem going along. Look, by and large, as we've started to look at where the market has gone more generally, you know, the returns on day hospitals are longer dated. In the short stay space, these facilities need to be built over a period of time. The returns are further out, as compared with growing our diagnostics businesses which, we've got very strong market presence with each of those. There are a number of things that have changed.
You know, I think, six years ago or five years ago when I sort of started in this role, we had sort of six businesses that all had their challenges. We've now got two very strong channels that have proven their strength over that period of time, and we have, you know, we believe a clear pathway forward for them. That's where the focus is now. You know, I think, if you go back to the beginning of that time, you know, you always wish that you knew everything then that you do now. You learn as you go along in terms of where this goes. We'll get a return on the capital that we've invested into Montserrat as part of this process, and we'll be able to redeploy that capital into our diagnostics divisions.
Okay. Thanks, Malcolm. Maxine, just if I could ask you a question about margin and as it relates to SIP in the pathology business. As we look forward into FY 2023, you're gonna have, you know, base business performance, but you also, as you flag, gonna have contribution from PCR and also Agilex. I mean, how? What abilities do you have to actually tease out the contribution of those various aspects? None of your peers seem willing to provide a margin on PCR testing. I guess, are you able to break out each of those components to give you confidence that you have indeed achieved those SIP targets in that division?
Look, I think as I said a little earlier, it really depends on volume. I mean, I mean, you're all very well aware that this is a leverage business, right? If we get normal normal trading, and you'll see that from the Medicare numbers, and you'll see what our revenue is, and we're clear around how many COVID tests we do. I think it will be we will be able to be, at the end of the period, transparent on certainly in terms of what the contributions from a top line perspective are. It is more challenging to work through the margins on each. I mean, we obviously you know have an internal view of what that looks like.
It is actually more a function of the volume, and of fee and BAU in terms of the contribution of margins to the overall picture, which we will be able to, I think, explain in some detail when we get to the close of the year. And look, the contribution from SIP initiatives, we've set what that target is. Look, if we had normal BAU volume, right, and we had, let's say 7,000 on average tests a working day, from COVID, we would obviously have a higher margin than 13% or 14%. It'd be higher. You'd be up around the 17%, right? What I can't predict is what is gonna happen to BAU volumes and COVID volumes.
No problem. Okay, thanks. That's all I had.
Thank you. Your next question comes from Craig Wong-Pan from Royal Bank of Canada. Please go ahead.
Thanks for taking my questions. The first one, just on the hospital imaging contracts you've won, I was wondering if there are many other tenders that are coming up in the next 12 months that you might be pursuing?
Yes, there are, but I think they're commercial in confidence, so I think that's probably all we can say at this point in time.
Okay.
Yeah.
Yeah, I just wanted to understand if there were some or not, or if they were already.
Yes.
secured. That's fine. The next question, just on CapEx. I was wondering if you could provide any commentary about what we might expect for CapEx for FY 2023.
Yeah. Okay. Look, I think there are a couple of call outs on CapEx, because there is a bit of a bump this year for two factors, right? The first is, in terms of, COVID, one-off COVID equipment, which I've said before can be repurposed into the labs. There was about AUD 28 million, over AUD 18 million in COVID equipment that we purchased in the year. And also earlier in the year, which we talked about at the half year results, we had a substantial lift in imaging equipment, which historically we've done quite a lot of leasing, but given our bank rates at the time, it was more favorable to purchase that equipment. Again, there was AUD 21 million in imaging.
Look, in terms of general maintenance CapEx for both the divisions, usually we run pathology at around AUD 30 million in maintenance CapEx, and I think that is still appropriate. Imaging has historically been running a little bit lower than what I expect it to run going forward, and so I'd set that at around the AUD 20 million-AUD 25 million mark going forward in terms of maintenance CapEx for imaging. Look, growth CapEx, you know, it's obviously dependent on what opportunities are ahead of us.
There is, as part of the SIP program, we talk a lot about margin and we talk a lot about cost, but there is a fairly substantial uplift that we're expecting in terms of revenue, investing in additional PETs and other equipment, where we have clear waiting lists, clear market opportunities. Investing in some of that growth CapEx in imaging is important. Acquisitions. Look, the only thing I have to say about that is we've called them bolt-ons. We're not looking at anything major or material at this point in time. Particularly in the imaging space, we see some really good opportunities that we'll work through over the course of the year.
Just to follow up to that last point, I mean, at your Investor Day, there seemed to be a strong willingness to expand into the U.S. clinical trials market. Your commentary today talks more about bolt-ons and imaging. I was wondering if that U.S. clinical trial market is still an attractive area for you to expand into.
Well, look, it certainly is, right? But it's not for now. I mean, our priority is about bedding down the Agilex acquisition and managing that growth that we're seeing coming through there, and that's our priority. Domestically, we see good opportunities in imaging. That's our priority for now. Look, I think the Investor Day talked more to an aspiration, not a medium-term priority at this point in time.
Okay, thanks. That's all my questions.
Thank you. Your next question comes from John Deakin-Bell from Citi. Please go ahead.
Thank you. Just back on the margins, I was just trying to understand the kind of leverage in Agilex. It's, you know, when you bought it, you implied about 39% EBITDA margin, so that's a lot higher than the rest of the path business. As it's grown, you know, like 30% or 40%, do those margins expand materially or is it not as leveraged as that?
No, it's not a leverage business like large scale pathology, John. I think you know a reasonable amount about this business. No, it's not. I mean, that's a target average. Look, in terms of. It's not material. Look, it's akin to sort of some of the more specialty segments within pathology, like genomics. While they have higher margins, you've really got to get to a meaningful contribution in terms of earnings, which and revenue, which it's not at this point in time for it to really, particularly in this year, for it to really impact the pathology margins.
Thanks, Maxine. Just on the imaging business, Integral Diagnostics yesterday were quite cautious on their outlook and really talking down a recovery. I know you're pretty cautious as well. Timing uncertain, you say in the presentation. I mean, can you just give us a sense as to how you're thinking about that and what might be the reasons why growth over the next 12 months might be as muted as they have been in the last 12?
Yeah, look, I think there's a few things to consider. Our imaging business has three distinct channels, and the impacts of COVID in each of those channels is different. So, in the medical center network, a shortage of GPs in that space is clearly a factor in driving volume. GPs increasingly are charging out-of-pocket, which also has a negative impact on volumes through that kind of network. In the hospital space, look, it's been pretty well documented, I think, as to where that is. They seem to be improving or for where that is. In the community space, been a reluctance to access healthcare. But as the fear. Look, long may that continue, that.
Big uptake there. That may be more about where we were and the fact that we have e-referrals now than it is about the market.
Your next question then comes from David Stanton from Jefferies. Please-
Coming through in that kind of inflationary environment, please.
A larger pipeline than what we're talking about today. I'm not giving any more numbers because we'd rather just deliver the ones that we have, as a buffer. For us, sourcing and procurement this year is gonna be pretty critical to manage that environment. Look, I mean, most of the consumables are a variable cost, right? It also is dependent on volume as well.
Understood. We saw a step up there, and you've outlined it beautifully. In terms of depreciation, could you just sort of give us a sort of directionally what should we be thinking in terms of depreciation and amortization increase into 2023?
Three.
compared to 2022?
Look, we expect that to be flat.
Okay. Very clear. Thank you.
Mm-hmm.
Finally, just from me. I'm interested in understanding why you've put Agilex into the pathology division and why not sort of separate it out so that we can see how gloriously it's gonna go going forward. Thank you.
Do you wanna answer that? Yeah. Look, it's right now we have our BD teams working together. We are taking on their sourcing and procurement, so there is a dilution of costs. I mean, I'd like to get it to a point where we can separate it out 'cause for us, separating out more specialist pathology, all of our specialized pathology areas would be something that we would like to talk about as a collective group. I just don't think we're at that point right now.
Understood. Thank you very much.
Thank you. That is all the time we have for questions today. For today, I'll now hand back to Ms. Payne for closing remarks.
Thank you, everybody. I think we've got a couple more on the line, so we'll take those offline so that we can finish nicely on time. Thank you for listening, and look forward to catching up with you on the roadshow. Thank you.