Australian Clinical Labs Limited (ACL) Earnings Call Transcript

Thank you for standing by, and welcome to the Australian Clinical Labs AGM. [Operator Instructions]. I'd now like to hand the conference over to Mr. Stephen Roche, Chair. Please go ahead.

Good afternoon, everyone, and welcome to Australian Clinical Labs 2026 AGM. My name is Stephen Roche, and I have the privilege of being the Chair of your Board. We, Australian Clinical Labs would like to acknowledge the traditional aboriginal and Torres Strait Islander custodians of the unceded land on which we work and deliver our services. We pay our respects to Elders past and present as the holders of memories, culture and tradition and extend that respect to Aboriginal and Torres Strait Islander Peoples here today. We acknowledge the multiple and complex factors impacting aboriginal and Torres Strait Islander Peoples as the original people of this country and value their connections to the land, sea and community. I've been informed by our Company Secretary that we have a quorum present, and I now declare the meeting open. Before we begin with today's agenda, I would like to introduce by fellow board members and key executives who are present at the AGM today. Here in Sydney, I'm joined by the Chair of our People and Culture Committee, Christine Bartlett,; the Chair of our Audit and Risk Committee, Mark Haberlin,, and also my fellow Non-Executive Directors, Sarah Butler and Dr. Amandeep Hansra. In addition, our Group Chief Executive Officer and Executive Director, Greg Horan; our Chief Financial Officer, Matthew Cordingley and our Company Secretary, Eleanor Padman, also joined us from Sydney. Joining us virtually from Melbourne is ACL's auditor, Mr. Ben Powers from Pitcher Partners. Ben will be available to answer questions that shareholders may have in relation to the 2026 financial statements and the conduct of the 2026 audit. I will now take a moment to explain the interactive features of the webcast platform that we are using today. A virtual meeting online guide was sent to shareholders with the notice of meeting, and I will now run through the key features. To vote, you will need to register by clicking on the Get a Voting Card button, and providing your security holder number and post code. If you are an appointed proxy, please enter the proxy number issued by MUFG in the proxy details section. Once you have registered, your voting card will appear with the resolutions to be voted on by shareholders during today's meeting. You may need to use the scroll bar to review all resolutions. On your voting card, you will see an option to enter a full vote or a partial vote. To vote, you can click for, against or abstain. If you wish to submit a partial vote, please enter the number of votes you wish to lodge from the total UFC displayed at each resolution. Once you have finished voting on all resolutions, please click Submit Vote. At the end of the meeting, a count down timer will appear and voting will end 5 minutes after the close of the meeting. Please ensure you get your votes in on time. To ask questions, shareholders can simply click Ask a Question. Depending on the volume of questions, we will focus on answering the most frequently asked questions. I would also ask that you can find your questions and comments to the business of the AGM. The notice of meeting for the AGM was made available to all shareholders, and I propose that it be taken as read. The notice of meeting can be found on our website under the Investor Center tab and there is also a link on the AGM platform, if you wish to download it from there. Today, I will begin with my Chair's address, then I will invite our Group Chief Executive Officer and Executive Director; Mr. Greg Horan to provide an overview of the FY '26 financial and operational achievements. We will then move to the formal part of the meeting. The notice of meeting that was sent to shareholders contained 6 resolutions. We will take questions as we address each item of business, and I will try to move at pace to ensure that we complete the agenda in our allocated time. This year, we enter our sixth year since Australian Clinical Labs listed on the ASX. FY '26 was a year of significant change for our company and another demanding year for the Australian pathology sector. Industry funding reductions, inflationary cost pressures and subdued market growth all affected the operating environment. Medicare fee reductions for vitamin B12 and urine testing, subdued general practitioner consultation volumes and lower respiratory in HPV testing contributed to a challenging industry backdrop. Despite these conditions, ACL delivered a resilient financial performance. Underlying EBIT increased to $69.3 million earnings per share increased year-on-year by 8.5%. Return on invested capital improved to greater than 25% and the company generated strong operational cash flows of $64 million. ACL also returned $47 million to shareholders through dividends and an on-market share buyback. Financial year '27 progress will be provided later in the CEO update. These results demonstrate the strength of ACL's national operating platform. The discipline applied across the business and the commitment of our people. The Board remains firmly committed to disciplined capital allocation. During FY '26, nvironment remains an important issue for $1.8 million of costs arising FY '27 guidance reflects ongoing labor cost headwinds, increase and further the company's diagnostic service also improved. Carbon emissions per pathology episode providing appropriate support and Melinda McGrath [Audio Gap].

Thank you, Stephen. Good afternoon, and thank you for participating in our AGM for 2026. It is a privilege to address shareholders as Chief Executive Officer of Australian Clinical Labs. I would like to begin by acknowledging the contribution of Melinda McGrath. Five connected priorities. First is disciplined network and contract growth. We will expand our collection center network and pursue new contracts where we can deliver appropriate returns. Growth for its own sake is not our objective. New locations and contracts must meet clear strategic service and financial criteria. Second is strategic new business. We will pursue opportunities in commercial pathology, research partnerships, genetics, specialized diagnostics and melanoma-relatd services. This area allows ACL to build on capabilities already within the organization while increasing the diversity and quality of our revenue base. Third is disciplined acquisitions. We will continue to assess pathology and adjacent acquisition opportunities, including opportunities associated with some doctors. Each opportunity will be evaluated against clear strategic and financial thresholds. We will remain disciplined in determining what ACL can create value through capability, scale, integration and synergies. Fourth is improved revenue quality, improving the completeness timeliness and quality of revenue capture is a significant area of focus. Our initiatives include digitized billing upfront payment processes, improved recovery of non-Medicare and unbundled tests, contract pricing and continued advocacy for appropriate industry funding. These initiatives are designed to ensure that ACL is appropriately compensated for the services it provides, while maintaining a clear and transparent experience of patients, referrers and customers. Fifth is furthering operational improvement. We will continue to progress Lab of the Future, the National Skin Laboratory, artificial intelligence, automation, procurement initiatives and route optimization. Our aim is to improve productivity and service delivery while reducing unnecessary complexity and cost. We will assess execution across those priorities by focusing on margin, revenue diversification, scale and synergies, revenue quality and cost per test. The strategic direction for ACL remains consistent. we're seeing encouraging signs of growth in the Australian pathology market, which has been stronger in the early part of FY '27 compared to the year prior. After a subdued FY '26 when growth in pathology volumes slowed across the major states. Medicare data for the first 2 months of the financial year shows national market volumes up 5.8% on the same period last year. Growth has been broad-based across most states. Most of this recovery has come from an increase in GP tenancies. These green shoots of growth in primary care are flowing through to pathology referrals. And ACL is seeing similar levels of recovery. ACL specialist pathology referrals have also increased so far on the year prior. For FY '27, ACL is targeting revenue of between $745 million and $765 million and an underlying EBIT of between $67 million and $73 million. And with the improved growth, we're expecting to be at the higher end of the guidance. This represents an implied EBIT margin of approximately 9% to 9.5%. The guidance reflects continued wage pressure and nonfunding settings. The final increase in wages related to the gender undervaluation outcome for pathology collectors is to be finalized on the 1st of January 2027 and this will be absorbed within our stated guidance range. The guidance also incorporates anticipated benefits from initiatives already underway, including upfront episode billings, pricing changes for non-MBS funded tests, Lab of the Future, artificial intelligence, initiatives and closer alignment between the workforce capacity and activity. Our FY '27 priorities are clear: maintain margin stability through known headwinds, execute the initiatives within our control, improve the quality and diversity of revenue, strength in productivity and service delivery and pursue sustainable returns focused growth. Share buybacks will continue to be assessed with regard to the company's funding requirements, strategic investment opportunities and ongoing capital expenditure. ACL has a strong national platform, committed people and a clear opportunity to improve performance through disciplined execution. We will remain focused on operational excellence, accountability, earnings quality, cash generation and sustainable shareholder returns. I would like to thank the Board for the confidence it has placed in me, our people for their contribution, our customers and health care partners for their continued support and our shareholders for your ongoing investment in ACL. I look forward to working with our teams across Australia to deliver the next phase of ACL strategy. Thank you, and back to you, Stephen.

Thank you, Greg. I would now like to proceed with the formal business of the meeting. The first item of business is to table and consider the financial statements for the year ended 30 June 2026, together with the director's report and the auditor's report, which are included in our 2026 annual report and which we have published on our website. I formally table the 2026 financial statements of ACL for the financial year ended 30 June 2026, the director's report and the auditor's report. I will take all of these reports as read. We will now take any questions submitted via the virtual meeting platform. Are there any questions for Greg or myself in relation to the company's performance or any matters raised by Greg in his address.

Stephen, we have a few questions from Steven Mayne. The first relates to AI. How many full-time equivalent staff do we currently have? And is this likely to fall over the coming 12 months with the rapid rollout of AI, which parts of our business and operations are the most prospective AI productivity gains and how energetically or fixing those opportunities. Also to what extent do we allow third-party AI agents into our systems for bookings and the like and to what extent the blockages.

Thank you, Ele. I'll ask as part of that -- or answer part of that question, Steve, and then throw to Greg for some of the detail around the AI elements that you described. So ACL has a workforce of approximately 4,000 people. In relation to the question around what level of impact will I have on that number. There will be some minimal reduction in that over the coming year, but let me then just emphasize that, that will be also supplemented by the redeployment of those individuals across the business. We are looking at ways operationally that AI can improve and improve our productivity across every element of our business as it can. And I'll probably now pause and through to Greg in relation to some of the other activity around that.

Thanks, Stephen. I would say in terms of our focus, as Stephen said, we are looking at the obvious productivity opportunities, but also how AI can help us grow. I'll say in terms of how energetically we're looking to embrace those opportunities. We are certainly taking an approach of developer governance and security first. before we continue to roll out broadly across the business. That is our main focus at the moment. And to your point, in relation to allowing agents into our system. Again, security here is the biggest issue for us and making sure we have a secure platform and so that is where we'll continue to focus before rolling out a broader program into FY '27. Thank you. Eleanor, are there other questions?

Yes, there's another question in relation to the merger and IPO activity. Australia is currently in the midst of an unprecedented venue obtainment that has contributed to listed MCs on the ASX, dropping by 11% since January 2023 to 2044 on September 30, 2026. Why do the Chair and CEO believe this is happening? There is a clear mispricing between public markets and private markets, but is there also a problem with the scrutiny and extra regulation of being listed. Does the Chair agree this is a problem for the nation, particularly with so few new floats replenishing the ASX ranks?

Thank you for your normal detailed question, Stephen. Let me say from the outset is not my view or my position to comment on market conditions necessarily and other elements of it. Let me just reinforce that whether it is a public or a private market, the price will be the price. What we need to focus on is that we are maximizing the performance of the business and improving returns to shareholders as a consequence and the market will price us accordingly with the circumstances in the environment that we operate within. Next question, Ele.

There are no other questions on this item of business.

Thank you, Ele. Are there any questions in respect to the 2026 financial statements for the auditor?

No, there are no questions. .

Thank you. Next item of business is the nonbinding shareholder resolution to consider the adoption of ACL's 2026 remuneration report. The remuneration report is contained within the 2026 Directors report and forms part of the 2026 financial statements and reports. Displayed now on the screen are the proxies that have been received to date in relation to this. Any votes from directors, key management personnel and their associates have been excluded from this resolution. Are there any questions in relation to this resolution?

Steve, we have another question from Stephen Mayne, which of the proxy advisers covered us this year and did any recommend a vote against any of today's resolutions, including this remuneration report item. If so, what reasons did they give and this translate into any material protest for this.

Thank you, Stephen. The answer to your question is that the majority of proxy houses canvassed us during the reporting season. So ownership matters, Glass Lewis all reported in relation to our reports and all resolved favorably to each of these resolutions. On that basis, then we didn't have a protest vote or any noncompliance in relation to the proxy advisers position on ACL. Are there any other questions, Ele?

No, there are other questions on this item of business.

Thank you. I'll now move for members to consider if in favor, to pass the resolution now displayed on the screen. It's not my intention to read the wording of each resolution for consideration today out loud given that they have not changed since our notice of meeting was sent to shareholders. But in each instance, I will give you all a minute to review the relevant resolution and take a moment to cast your vote. Thank you. The second resolution is to consider the reelection of Dr. Amandeep Hansra in accordance with the Corporations Act and ACL's constitutions. Amandeep is our newest director and was appointed to the Board as a casual vacancy on the 1st of July 2026. In accordance with ATL's constitution, Amandeep now stands for formal reelection by shareholders at this -- the first AGM following her appointment. The Board is delighted that Amandeep has agreed to join ACL's Board. Given her more than 20 years of clinical experience as a general practitioner as well as extensive executive experience in digital health leadership and government engagement. Since joining the Board, Amandeep is considered to be an Independent Director. The Board with Amandeep unanimously recommends that shareholders vote in favor of her reelection. Are there any questions in relation to this resolution, Ele?

No, Steven, there aren't any questions in relation to this resolution. We have had a couple of questions come in relating to the previous resolution that I take a moment now to pay your attention to. So the first is from Mr. Wayne Arthur. I'm coupled by the chair saying, EPS increased by 8.5% and in the profit and loss statement, the EPS declined from $0.16 per share to $0.12 per share. .

I think we can take that on notice. I'm more than happy to speak and contact Mr. Arthur following the meeting. I'm not certain whether we'll be dealing with the difference between underlying and statutory but I'm happy to contact Mr. Arthur post the meeting.

Thank you, Steven. And another question from Mr. Arthur. We share buyback. Do you think it is a bit odd that you are paying money to people who no longer want to be shareholders is into the reset and just to concentrate on paying frank dividends to loyal shareholders. .