Healius Limited (HLS) Earnings Call Transcript

Thank you for standing by, and welcome to the Healius Limited 2021 full year results presentation. [Operator Instructions] I would now like to hand the conference over to Ms. Janet Payne, Group Executive, Corporate Affairs. Please go ahead.

Morning, everyone, and welcome to the 2021 results presentation for Healius. Thank you all for dialing in. I'm sure it's been -- you're all feeling the effects of a long lockdown impacted-results season, so hopefully, we will keep this quick and efficient. I have on the line with me today Dr. Malcolm Parmenter, our CEO and MD; and Maxine Jacquet, our CFO and COO. So without further ado, I will pass you on to Malcolm. Thank you, Malcolm.

Thanks, Janet. Hello, everyone. Welcome to our FY '21 results. Thanks for joining us this morning. As you'll see from the presentation, FY '21 for Healius was an incredible period. It was incredible not only in terms of financial performance but also in terms of what our wonderful team of people have been able to deliver to play their part in helping Australia fight this pandemic. Healius has been at the very center of this country's response to COVID-19, performing more than 5.75 million PCR tests to date. This has entailed a huge effort by our frontline workers and support staff but especially in New South Wales and Victoria and extending us well beyond our usual capacities and capabilities. And so I want to acknowledge and thank all our people for their tireless work often in the face of real threats to their own personal safety. In particular, our Pathology teams have seen pressure like never before, pathology collectors, couriers, data entry people, call center staff, IT people and lab staff. We simply wouldn't have achieved what we have without their selfless and tireless service to the community. It's been a huge achievement in terms of logistics. We've reconfigured our laboratories to accommodate new equipment. We've set up 89 dedicated drive-through collection centers for COVID testing to facilitate safe and easy public access. We've supported both our metropolitan areas and regional communities with sourced reagents, testing equipment, PPE, marquees, communications equipment. We've operated our facilities, often 24 hours a day, 7 days a week, in all sorts of weather from very hot summer days to sub-zero snowy days in Central West New South Wales. We've maintained capacity to manage huge surges in testing. We've introduced technology innovations such as results by text and e-commerce to direct-to-consumer testing. And we've successfully moved tests between laboratories leveraging our national network to cope with surge demand in an individual state. Now some states have had bigger challenges than others. And I'd like to say a particular thank you to Matt Brumby, our GM of Laverty Pathology; and the Laverty team in New South Wales. Since this most recent outbreak started, I know Matt has been working 7 days a week and surviving on 3- or 4-hour sleep at night just to keep up. And I know his team have likewise been pulling extraordinary hours when the demand has been huge. Our Dorevitch Pathology team in Victoria has also faced surges in demand at times of outbreaks, as have our businesses in other states. It's a truly remarkable achievement and one that the entire team can be proud of. I'd also like to say how well the private sector has worked with the various state public health systems, coordinating our drive-throughs, ensuring positive results are reported reliably and as quickly as possible and finding solutions when demand outstrip capacity and, yes, assisting each other when needed. On that point, a big thank you to Dr. Colin Goldschmidt and Sonic Healthcare for their assistance to Laverty when demand outstrip capacity. Competitors helping each other in the delivery of health care to our communities is just another one of the firsts to have occurred in the -- during this pandemic. And I'd also like to thank the federal government for supporting the indispensable part private pathology has played in the nation's response to the pandemic. Well before there was a viable fee for PCR testing, Healius, at the request of the federal government and with the additional support from the Minderoo Foundation, began installing large-capacity PCR testing equipment in its laboratories. The investment was significant and it occurred at a time when our non-COVID pathology volumes have collapsed. We didn't install the gear because we were obliged to or because we thought it was a good financial investment but because it was clear to us that there was a high chance Australia would need this capacity. I know Sonic made a similar investment. And as we've shown over the last 18 months, Healius continues to have a strong commitment to delivering what governments and health departments need. Can I also say it's not only our Pathology teams that have faced challenges over the past 18 months? Our Imaging and day hospital teams have also been tested. For each of our staff members, there has and continues to be a genuine risk that the patient in front of you has COVID; that you might catch it despite your PPE and take it home to your family, putting them at risk as well. Despite that, our people keep coming to work and providing the essential services that are needed. These people are heroes in my books, simple as that. It's been a remarkable performance all around by our people, the like of which I have never seen in all my years in health care. And I'm very proud and fortunate to be a part of it. So with a stronger balance sheet, improved cash flow and a streamlined portfolio, we at Healius are in the process of building a sustainable business, sustainable for our people, for our shareholders, our customers and our communities. Our business is now on a significantly better trajectory. We're already delivering organic growth in day hospitals and diagnostic commercial streams. We've also introduced the SIP program, which aptly stands for Sustainable Improvement Program. This is not about cutting the guts out of business costs for short-term margin expansion. It's about investing for our future through data-led operations, consumer centricity, product innovation, network optimization and core competencies for the future. Our shareholders have benefited with $101 million in share buybacks, with more to come; and $80.5 million in fully franked dividends determined for FY '21. And we have a strong capital position to further fund growth. In terms of our people, we're not just thanking them. We're rewarding them for their huge efforts. We gave all of our permanent staff 3 days of extra leave in FY '21. We've allowed them to build their leave balances this year, when holiday travel has been pretty hard to plan and, as most of you know, even harder to take. And that has seen our provisions for leave grow by 28 million in the year. We've introduced a new parental leave policy across the group, started a new communications and resources hub and hosted an annual well-being program. We also have a reward scheme that goes deep within the organization, and we intend to do more for them in FY '22. This is not just a reward for effort. It's an investment in our people and part of making Healius the preferred place to work. For the Australian community at large, over and above the COVID-19 imperative, we are continuing to deliver our essential frontline health services safely, efficiently and effectively throughout the many state-based lockdowns. We've committed to carbon neutrality by 2025 and we're building a pathway to ensure we get there, and we have a raft of emissions reductions initiatives already in train. Innovation in COVID-19 has improved consumer interaction and this is here to stay. It includes texting negative results and working with the travel sector on testing certificates for when borders reopen, but there's a lot more we're working on. With our strong cash flow, we are taking the opportunity to invest in leading-edge applications to permanently change for the better how consumers access diagnostic health care in Australia. So turning to our group results. Let's not forget that, in this COVID-dominated year, we completed the sale of our medical center business. This really was a watershed moment in our history. It has simplified the group, leaving us with a far more capital-light portfolio and businesses with real growth potential. Overall in the year, revenue grew by 22% to nearly $2 billion. Underlying EBIT doubled to a record $266.5 million, and underlying NPAT was up by more than 150% to $148.4 million. Now Max will have more to say on this matter, but I wanted to emphasize upfront our success in cost containment and efficiency with labor costs at only 2.6%, up on -- only 2.6% up on 22% revenue growth after normalizing for the leave initiatives I mentioned. We generated over $500 million in gross operating cash flow in the year, with our conversion of EBITDA to cash at 106%, which is outstanding. We also saw a net $387 million inflow in investing activities, mainly from the proceeds of the Medical Centres sale. This enabled the company to dramatically improve its capital position, reducing debt by some $556 million; rewarding shareholders with the buyback; and determining a final fully franked dividend of $0.0675 per share, which brings total dividends for the year to $0.1325 per share. These dividends represent a payout ratio of 62% of statutory NPAT. In calculating the payout ratio, we've made an upward adjustment for the noncash credits which we recorded in FY '20 and then reversed in FY '21 concerning the old ATO case. You may recall this case related to the tax deduction of GP upfront payments back in 2003 to 2007. We reversed the amounts this year after disappointingly divergent court decisions were made on the case. It's a noncash adjustment and doesn't impact anything else. Our underlying results exclude Medical Centres and Adora Fertility, as these businesses were classified as held for sale in the year. Subsequent to year-end, we announced the sale of Adora to Virtus, and it draws a line under our current portfolio simplification. We now have a great collection of assets, a healthy balance sheet and a strong focus on investing in our sustainable future. Turning to the Pathology slide. The division certainly had a good year. I've already spoken about the huge effort we've made in community COVID testing. We also have COVID-19 testing contracts with the federal government and the opposition, a raft of private companies and sporting codes, travel companies which will come into their own when the country finally opens up its borders. COVID-19 testing was the prime driver of the 25% growth in revenue. Non-COVID revenue grew both -- grew on both FY '20 and FY '19 levels, showing how resilient the drivers of health care are even in the middle of a pandemic. And overall, our non-COVID revenue growth on FY '20 was 6.8% on a like-for-like basis. What's more, EBIT more than doubled to $252.8 million and a margin of 17.4%. Our focus is firmly on our earnings growth rather than on our approved collection center share. We ended the year with an 8% smaller ACC footprint after closing around 175 low-margin sites. This has delivered an immediate earnings benefit. We spent $32.5 million in capital, primarily on a new main laboratory for Western Diagnostics in Perth, together with our digital initiatives. The upgrade to the Serum Work Area is now complete other than at Dorevitch which should be finalized this half. You'll see we received an additional $9.8 million relating to the pathology agreement with the federal government for April and May 2020. And I should reiterate just how important that agreement was in April and May last year, when the country was shut down and funding for COVID testing hadn't commenced in Australia. We needed that support to keep our capacity open. And we have made good use of it, scaling up rapidly in the winter last year and many times since then. We also made a bad debts provision in the year, which offset the EBIT benefit from this additional revenue. Turning to Imaging. Imaging delivered revenue growth in all of its channels, hospitals, community sites and medical centers. Notably, it grew 18% in the second half off the back of a softer comparable period. And as we've explained before, Imaging has a large hospital portfolio and a strong presence in metropolitan areas in Victoria. Hence, its revenue and EBIT have been impacted by the many lockdowns in Victoria. On a normalized basis, revenue growth was close to market, with the ongoing ramp-up of the Northern Beaches Hospital in Sydney being a highlight. Divisional EBIT increased over 40% on FY '20. However, the margin bore the impacts of our constrained Victorian operations and of additional COVID-19 costs. The Imaging core application refresh was broadly completed in the year, delivering productivity savings and an improved referrer and consumer interface. We spent around $18.6 million in capital on a new facility at Orange, upgraded imaging equipment and a new brand called Lumus Imaging. We also extended the imaging footprint, announcing the synergistic acquisition of Axis radiology in Queensland. In our day hospitals division, with the sale of Adora Fertility and 3 co-located day hospitals, our day hospital division now includes Montserrat's 11 hospitals and Brookvale day hospital in New South Wales. The division had a good year, operating predominantly in states with lower numbers of lockdowns. The revenue grew by 32% to nearly $50 million, with Montserrat up 34% and Brookvale up 15%. Montserrat's revenue growth came primarily from Westside Private Hospital, which grew its surgeon base; undertook nearly 1,000 procedures per month at its peak; and successfully commenced short-stay orthopedic surgeries, including hip and knee replacements. Montserrat's EBIT was up 8.3 million with -- up to $8.3 million, with good cost control assisting the strong top line growth. Brookvale also delivered a profitable EBIT in the year of $0.7 million under the management of the Montserrat team. Montserrat is focused on further ramp-up of its 4 new sites, which have collectively more than doubled their contribution in FY '21. The division has a pipeline of greenfield and brownfield sites as it looks to capitalize in this growing sector. I can also confirm the division repaid the JobKeeper payments received from the federal government in the first half of this year. I should let Max talk about corporate costs, as this is her area, and her achievement in removing the $15 million of so-called stranded costs after the Medical Centres sale. Of course, you don't see those savings on this slide, but their removal means we have not increased overhead charges to the divisions or left a larger balance unallocated. All in all, our corporate costs are now tightly managed despite ongoing price pressures that we're benchmarking favorably compared with other companies. In the fourth quarter of the year, we started to ramp up our capabilities in areas such as strategy, corporate development and data analytics, together with IT and HR support services. We expect corporate costs will rise by about $5 million in FY '22 while remaining below 2% of the total cost base. It's all part of our investment in a sustainable business. And on the topic of sustainability, I'd like to give you a quick update on where we are at Healius. I've already mentioned how important this is to us. Obviously we see our purpose and mission go to the very heart of our social contract and our sustainability agenda. We deliver essential health services to the communities of Australia, and we help keep Australians healthy at every stage of life. And we're playing a really pivotal role in managing the current COVID-19 pandemic, but we also see the other areas of sustainability as crucial to our future and the future of our people and our customers. We're in the middle of an in-depth review, and we'll have the results detailed in our next sustainability report which will be issued towards the end of this year. This is being driven by our new sustainability committee co-chaired by 2 of our group executives. We are today announcing our goal to be carbon neutral by 2025. We currently have 33,000 carbon dioxide equivalent scope 1 and 2 emissions, and we'll be reducing these to 0 over the next 4 years. We're in the middle of rolling out solar panels and LED lights to our buildings, and we'll be acquiring hybrid vehicles for our courier fleet in FY '22. We've consolidated waste management into 2 Tier 1 providers, and in partnership with them, we'll be looking to reduce our waste footprint. This year, we've recruited 2 new female directors for our Board, meeting our gender diversity target for the Board. And as I mentioned, we're investing in our people and in our systems. And just finally for me, a trading update. It will be no surprise to anyone to hear our trading in July and August has been very strong. Obviously there's been a surge in COVID-19 testing with the emergence of the Delta strain in this country. We have seen 40,000-plus COVID tests per working day on average in July and August, well above the numbers that we're seeing at the same time last year. We are currently investing in technology and equipment to further increase our capacity across the eastern seaboard and remain at the front of the community testing response. Our non-COVID Pathology, together with Imaging and day hospitals, revenue are all on a par or ahead of what was also a COVID-impacted prior period. As with last year, we will not be giving any guidance due to the difficulty in forecasting where COVID infections will go this year. And we found that regular trading updates are more effective in these uncertain times. And with that, I'll hand over to Maxine Jacquet, our CFO and Chief Operating Officer, to talk about our cash flow, capital management and SIP program. Thanks, Max.

Thanks, Malcolm. And good morning, everybody. Turning to capital management on Slide 12. In December, Healius finalized our capital management review, coinciding with the sale of the Healius Primary Care business. Our objective was to recalibrate our capital structure and policies to minimize cost of capital while providing sufficient capital flexibility to meet business growth and shareholder return objectives. These results were announced back in December and outcomes are on Slide 13. I won't repeat the details here, rather provide an update on a couple of the items announced. Since the review, our capital position has tracked on the upside of our forward projections given strong cash flow. This has given us additional growth and shareholder return options, which we will discuss later. For the announced on-market share buyback program of up to $200 million in calendar year 2021, to July, we've repurchased 24.35 million shares from the market at an average execution price of $4.14, for a total purchase value of just over $100 million. We've also reduced our debt facility by $495 million from over $1 billion to $600 million, in line with our lower gearing targets. We also closed out 170 million in ineffective interest rate swaps, with 230 million remaining on foot, with 200 million to be closed out by July 2022. On to Slide 13, on our capital position. Healius is strongly positioned for growth with a robust balance sheet, generous liquidity headroom and strong cash flows. During the year, Healius paid off $556 million in loans. This yields an annualized interest saving of $9.2 million. Net debt at 30 June was $205 million, with bank gearing ratio at 0.7x. This is the lowest in recent history for the company and well under the bank covenant of 3.5x. The strength of our balance sheet was as a result of our capital-recycling initiatives, which netted $460 million in proceeds primarily relating to the settlement of the Healius Primary Care sale this year; and of course, the strong operating cash flows of the business. Gross operating cash flow for the year was $572 million, which was 41% higher than prior year, and pleasingly reflected an EBITDA conversion of 106%. The cash conversion was achieved through improvements made in working capital management through a number of initiatives which substantially reduced days outstanding of our accounts receivable. This result is even more marked given that we repaid $60 million to $70 million, plus $40 million in tax deferrals from the cash conservation drive in late 2020. CapEx from continuing operations across both maintenance and growth totaled $60 million for the year, materially below prior years. Free cash flow for the year was $486 million, up 38% on prior year. The balance sheet and cash flow strength unlock investment options. And in the near term, we expect capital expenditure to increase as we redeploy capital into a number of strategic programs that we believe will accelerate growth and increase shareholder returns. We'll talk to more detail on these investment areas in the next section. Turning now on to our progress on strategy execution, in particular the Sustainable Improvement Program. Strong inroads are being made. Slide 15 highlights some of the results of these initiatives. In FY '21, total business activity was up 22% versus prior year. Cost growth, in comparison, was controlled. Expenses for the year, excluding D&A, were up 12% versus prior year. In particular, labor costs half-on-half were up only $10 million. And on a cash basis taking into account the leave management initiatives Malcolm mentioned, we were down 4%. And year-on-year, adjusting for those differential leave impacts, group labor costs grew only 2.8% despite having a substantial increase in casual labor to meet COVID demand. Property costs also benefit both from the increased utilization of our property assets and from our network footprint optimization initiatives, leading to substantially enhanced productivity. Unsurprisingly, consumables increased considerably in the period due to increased COVID testing and additional PPE required to operate the business and protect staff. Turning to Slide 16, on the Sustainable Improvement Program update. As mentioned in the half year results, SIP phase 1 delivery is now complete, with over 200 initiatives delivered and realizing a net annual cost saving in our continuing operations of $58 million. This outcome was delivered ahead of schedule and could not have been achieved without structured enterprise-level program management. Healius also instituted a separate enterprise cost-saving program focused on support service expenses following the sale of the Healius Primary Care business. As Malcolm mentioned, we're pleased to announce that, to date, we have achieved the targeted $15 million per annum in support service cost savings in the areas of telecommunications, facilities management and utilities and outsourcing of the global business services. Having recalibrated our costs, we are on a better platform to deliver the next phase of growth. We've extended the SIP phase 1 delivery infrastructure into phase 2, where we've broadened the focus to structural productivity and revenue driver improvements as well as investing in our people and capabilities required for long-term and sustainable growth. The target outcomes have been set at 300 basis points of EBIT margin growth by FY '23 for both our Pathology and Imaging businesses. We have brought in people with specific expertise in digital, logistics, sourcing and commercial to work alongside the operations team to manage the business improvement program. Considerable headway has been made this year in each of our phase 2 streams: digital, network, workforce and sourcing. Under digital, we've reduced our fuel consumption and CO2 footprint for sample collections by implementing vehicle-monitoring devices. We've implemented pilots of digital pathology in the veterinary segment. This is an exciting and developing area, and you'll no doubt hear more about our expanding capabilities in this space. We've also implemented our first large-scale deployment of radiology AI. This supports our work with the department of immigration, where we do a high volume of chest X-ray health screenings for conditions such as tuberculosis. AI is a promising area, and we will have other pilot programs in this space. We have also been doing substantial work on our digitizing our imaging clinics as we uplift our service in FY '22. This work will support our overall customer experience focus that Malcolm talked about. In network, 2 areas I'd like to highlight were our commercial COVID testing response and our efforts around footprint optimization. In commercial COVID testing, we've commercialized a national consumer COVID testing service, with over 50 contracts on foot with a wide range of Australian organizations. Our ACC footprint optimization tool has enabled us to realize a high-yielding network driving margin improvement while maintaining our critical distribution coverage. We've also rationalized our footprint in Imaging with the closure or consolidation of 10 sites and opening of 2 new large multi-modality clinics in [ Bloomfield ] and [ Tweed ]. And despite the operational challenges of COVID, our workforce management initiatives were progressed. There are several focus initiatives and enabling programs underway: upgraded and standardized systems for rostering of our distributed workforces in Pathology and Imaging, lean optimization of laboratory operations, enhanced productivity tools for frontline employees such as sonographers. Under sourcing, we've had a wide range of wins this year. In aggregate, despite some headwinds to delivery posed by the pandemic, we're still committed to delivery of our margin targets in FY '23. Turning to Slide 17 and looking forward. As Malcolm said, this is an unprecedented time in our business, and we intend to use our strong balance sheet and cash flow to invest in enabling growth. Capital expenditure areas expected to increase in FY '22 include scaling up our Pathology information system implementation; SIP phase 2 program investments such as new workforce rostering systems; Lumus rebranding; greater mix of outright purchase versus leasing in Imaging; inorganic growth through bolt-on acquisitions, such as Axis radiology which was completed this year. Outside of significant acquisitions, we will fund these investments from cash flow. On to Slide 18, our Pathology information systems. The Ultra LIS is working well despite being tested with an extraordinary increase in volumes. We've done over 5.75 million COVID tests, which is a substantial increase on our regular volumes, with many days doing over 100,000 tests in our labs, with 20% of these tests moving between our labs seamlessly. Over the last year, we have digitized the COVID collection process currently being rolled out in our drive-throughs; developed a first-to-market QR code results report for travel; built a new integration platform to streamline interoperability between our LIS and third parties; fully automated our Serum Work Area in WDP, QML and Dorevitch across high-volume chemistry, immunology and serology tests; launched an e-commerce portal for the travel segment to order COVID tests; progressed the standardization design to adopt one national set of test panels, results interpretation rules and report commentaries. These will give us greater agility to make changes and improve operating efficiencies. Further strengthening of Ultra is also underway, with additional database capacity and disaster recovery redundancy to be completed by the end of 2021. Looking ahead, we will continue with our customer-centric and end-to-end Pathology information system digitization program. As we said in December, we are taking a modular approach to the modernization covering 6 key modules, being referrals, orders, tests, reports, payments and insights. This enables us to use a combination of in-house solutions that are fit for purpose alongside new best-of-breed and off-the-shelf solutions. We are also prioritizing patient and doctor touch points for accelerated digitization in areas such as order management and results delivery. We view this journey as an important BAU digital capability build for the business and not just a one-off project. We are expanding internal capability in areas such as customer experience, digital products, data engineering, artificial intelligence, cloud infrastructure and cybersecurity. We will also put in place several strategies to reduce the operational risks associated with technology modernization. We are still expecting to work within the capital investment envelope previously committed of $85 million to $90 million over the next couple of years. That's all for me. Thank you. I think...

Thanks, Maxine and Malcolm. We'll hand over now to questions, please.

[Operator Instructions] Your first question comes from David Low with JPMorgan.

Maxine, perhaps if I can just start with the SIP program. And we sort of look with great interest with the 300 basis points of margin improvement by '23. It's clearly going to be quite hard to [ unpick ] in the current environment. I was just wondering what sort of measurables or what we should be looking for in FY '22. Perhaps it's [ clearing Imaging ]. What -- where is it going to be clear for from an outsider's to see these improvements come through?

Yes, thanks, David. Look, as we communicated before, there are a couple of things which obviously underpin those target levels that we set. One was the BAU growth and the other was the uplift. So where -- the uplift numbers still remain. The one thing obviously that is less certain is BAU with COVID. So in Imaging, we were clear what it was. It was $19 million in uplift from Imaging in SIP savings, and for Pathology it was $48 million. Now it is a combination of revenue and costs, and those numbers are what you'll see in the FY '23 numbers. There will be some improvements in FY '22, but FY '22, as we previously said, is very much our enabling year. We've got roster management systems going in. We've got optimization software going in across couriers, et cetera, so you're not going to see the large uplift in FY '22. It will be FY '23.

Okay. And when you talk about the $19 million and the $48 million, that's relative to what?

It's relative to the FY '19 numbers.

Yes, okay, all right. And just changing topics a little bit: There's been a fair bit of press coverage about Laverty's challenges with turnaround times. Perhaps that was addressed. I dropped off the call for a few minutes. I'm sorry, but could I get you just to talk about what happened and where it's at now and whether there's any sort of material financial implications for the business?

Yes. It -- I mean demand for COVID PCR testing in New South Wales has been at extraordinary levels. And I think the entire pathology services, whether public or private, have been stretched to get to where they are. And they gradually accommodate for that, right? So the -- I mean we're expanding our capacity, and my guess is probably others are as well, around that. There was a period of time there where it ramped up very quickly and a -- in a very short space of time. And the issue wasn't so much around the ability to actually do the test but the data entry components of it. And that resulted in a -- us shifting some of that work in the state to -- and being supported by Dorevitch and QML and even Western Diagnostics through that period of time. So there was no impact on revenue. In fact, it was a very positive impact on revenue, if it was anything, because of the simply extraordinary demand. You had 35,000 or so tests coming into Laverty alone on a national basis. So no negative impacts there. And I guess that's what I was referring to in -- when I was speaking earlier about the sort of unusual event of pathology providers supporting each other during that period of time because Sonic certainly helped us out with some of that volume that we were doing back then. And that's been something that works both ways over time.

And look. There's another positive, I think, out of that, which is it certainly has fast-tracked the QR code and the digitization of collection through drive-throughs which is now being currently rolled out through Laverty. So that essentially takes that data entry and that paper process out of it, which was where the bottleneck was.

Great. And look, one last question. [ I note there was sort of the ] bad debt in Pathology and some update on government grants. Could I get a little bit of clarity as to what that -- sort of what both of those issues are about, please?

Yes. So look, the bad debts issue is a cleanup of bad debts, and it was precipitated really by COVID. We did a cleanup of our debtors balance and looked to recover what we could from oversea health funds and overseas individuals and basically have done a whole process cleanout. So that offsets the government grant revenue which we recognized in the period.

And the government grant [ was largely a ] first half contribution.

There was some in the first half, but also it's about 10 points...

[ 9.8 ]...

9.8 [ in the year ], yes.

[ 3.8 second half ].

Yes, 3.8 second half.

The next question comes from Chris Cooper with Goldman Sachs.

Can I just start on the balance sheet and the priorities at this stage? I believe you said, Malcolm, the sale of Adora draws a line under portfolio simplification, so can I just confirm that means no further plans for any further sales or corporate restructure in the next couple of years?

Yes. Look, that's where we're at. We've said previously that we've got a plan to improve the margins in both our Pathology and our Imaging businesses and our day hospital business. And we're building a pipeline of -- or we have a pipeline of new greenfield sites that we're building across the country. So further sales are not on the agenda at this point in time. And I think we certainly have been running the ruler across potential M&A opportunities around that, albeit prices are competitive at this point in time.

You mentioned the CapEx spend is likely to step up again. Could you just give us some sense of sort of rate or trajectory? Or some kind of guidance in terms of materiality would be helpful.

Yes. So look. I -- we previously said between $55 million to $75 million. And we're sitting at $60 million today and plus obviously the LIS program. I think we'll step up closer to that $75 million, plus LIS. Look, it is dependent on how much technology we can roll out this year. Just getting some of the programs out to our workforce is a little challenging with lockdowns, but I would set it at the higher at the $75 million. It also includes some expenditure in Imaging as well in terms of the rebranding rollout and, as we've talked about before, the LIS program. So set that at $20 million.

And the latest timing on the LIS program, Maxine. I mean you talk about $85 million to $90 million being reiterated today. I know the initial hope and expectation was to be implementing this from the end of this calendar year. Is that still the plan? And at this point, do you have a more accurate idea of the OpEx-versus-CapEx split on that $85 million to $90 million?

Yes. Look. The second question: We don't have a more accurate split. And as we work through with vendors, we obviously have some choice around that. The -- in terms of the timing, we've still got a 2-year program, but it's going to be progressive delivery across each of those 6 areas. So focusing on the front end in the first instance, which should be completed within a 9-month time period, and then progressively moving through the other areas. So look, as -- each reporting period, we'll obviously update you on what has been implemented.

Okay. And maybe if I can just squeeze one final one on the '22 update, the trading update. So it seems, though, from the commentary and from what you were saying prior to the results that maybe the performance in the underlying businesses has just slowed. Now obviously we are facing some challenging restrictions, which I assume are playing into that but also just wanted to clarify. I mean some of those restrictions were kind of playing out before that when you were making the prior comment. So I just wanted to clarify there is nothing else that was sort of impacting the base business and perhaps contributing to a bit of a slower performance, obviously COVID testing aside.

Yes, I'm not sure that's quite how we would reflect it. I think we -- certainly in Pathology and BAU we're obviously tracking the market and feel comfortable where we're tracking in Pathology. Look. Imaging, as every lockdown occurs, there is obviously some impact there; and similarly with day hospitals, particularly in Brisbane, given our exposure to Queensland. There was at one of our sites, our biggest site, obviously Montserrat. At Montserrat, Westside was impacted in the last period but, look, nothing materially at this point in time. We'll just have to see how the year plays out with lockdowns. And I think that will be most prevalent in Imaging, as opposed to Pathology, because I think, Pathology, we're pretty comfortable with where BAU is trading.

The next question comes from Gretel Janu with Credit Suisse.

Can you just confirm what the average COVID testing volumes were per day in FY '21 and particularly second half '21 sort of versus that 40,000 that you gave as what you're currently doing in the outlook commentary?

Well, look. In terms of total numbers, we -- as we said, we've done 5.75 million to date. So I think you can work out from what we've said previously with previous updates where those numbers have been.

I think [ there was about ]...

[ From previous updates ], you had called out around 10,000 tests per day, so I'm just confirming that in that last quarter of FY '21 it stayed relatively consistent. Is that right?

Yes. That's -- yes, yes. 10,000 is a good number to use, yes.

Yes, yes.

Yes. It's -- there seems to be, in terms of COVID testing, when there aren't lockdowns, that it falls back to that kind of number around as a base number as people with colds and various other symptoms have -- are tested. And then it tends to flare back up again once you -- once the threat of COVID returns, which it certainly has now.

Understood. And then so just looking at sort of Pathology EBIT margin for second half '21. It was actually weaker relative to first half '21, which from my perspective is a little bit surprising given all of the collection center rationalization and the fact that COVID testing did remain quite robust in the second half. Is there anything else that we should be aware of as to why it was slightly weaker in second half relative to first half?

I'd say it's 2 things. It would definitely be consumables, increasing consumables costs with a surge in COVID testing. That would be the main item; and definitely, the leave, the buildup of leave, which is obviously given the workforce sitting in Pathology's, the big buildup.

Understood. And so going forward, with the big surge in COVID testing that we're seeing currently, is that being done at a lower margin relative to what you're doing previously just given high consumable costs at this point in time?

No, no, no. It's definitely not. No, it's not. And look, we've had some savings in terms of input costs around COVID, so on a per-test basis, no.

Okay, understood. And then finally, just in terms of the balance sheet, you do have still quite some capacity there before reaching your target gearing levels. I guess, what have been contemplated from an M&A perspective at this point in time?

Do you want me to answer that, or do you want to answer that?

[ Okay ].

All right. So well, look, we've -- there's obviously what we call the portfolio management initiatives. So that's just bolt-on acquisitions in both Pathology, some smaller ones in Imaging and then day hospitals. And we do have quite a pipeline of smaller acquisitions for each of those businesses, but even in some of those the prices being paid for smaller assets is not something we think makes a lot of sense. But still, pipeline is still quite strong there. And then we've been looking more broadly at other areas of M&A and not within the existing portfolio, though.

The next question comes from Lyanne Harrison with BofA.

Thank you so much to your team and for all the work you're doing at the COVID front line. I might start with COVID testing, particularly in New South Wales. Obviously volume of testing here is very high. I think that will increase as [ new ] cases grow further. What sort of capacity are you currently running at? And you also mentioned you're seeking to invest further in increasing capacity on the Eastern -- in the Eastern states, so where could that grow to? Or are you still possibly going to have some overflow going -- moving to other states?

Well, look. At the moment, we don't have any overflow going to other states. And average turnaround time for Laverty at the moment is well under 24 hours and getting shorter. And so we're putting in more capacity above that, plus. And we're doing that at each of Dorevitch, Laverty and QML, so -- and look, we've got the ability to grow that as much as we need to. We can do it reasonably quickly in terms of where it goes. The -- that additional capacity in Victoria is about to go online in -- sometime later this week, and likewise with the other states are not far behind that. So look. We can ramp up capacity, and I think others will as well, all right? It's been the story of the pandemic, if you like, that we kind of all started off with far lower capacity than we currently have, but you can ramp it up. And look. We're seeing the advent of kind of the 3 variants of COVID testing now with rapid antigen testing, rapid PCR, which are sort of smaller machines that can provide a result on site faster but have limited numbers of tests per hour; and then the high-volume PCR testing that exists in laboratories.

Okay. And how should we think about staffing? Just following on from Gretel's question there. Obviously your staff are working round the clock. Some of them might be fatigued, and then you're seeking to add further capacity. Is this putting, I guess, short-term upward pressure on your staffing costs?

No. Look, it isn't at this point in time. I think we've been able to -- through a fair bit of the pandemic, we've been able to shift resources from BAU into COVID testing at times when we've needed to do that. And so -- and you'll see that in the sort of total staff costs, that we haven't seen that increase. Over the last 2 months, we've taken on quite a lift in the number of casuals in New South Wales in particular who were doing testing and courier and data entry around supporting that massive increase in volume, but that's well and truly supported by the funding for that part of it.

Okay. And just final question here, if I think about some of the non-COVID revenues. Obviously we've got good growth in veterinary testing and genetics testing. What can we expect in financial year '22 in terms of rate of growth of this higher-value testing for the remainder of this year?

So higher-value testing being in -- you're talking non-COVID testing here.

Non-COVID, that's right.

Yes. So look. Look, it is hard to say. I think, unlike when the pandemic first hit in March and April of 2020 and when people stopped accessing health care, we haven't seen with any of the subsequent lockdowns that kind of level of drop in BAU. It was 40-odd percent back then, and now it's -- now you don't see that kind of impact. And it does tend to recover. People are still accessing health care on a BAU basis, so right at this point in time, it's still up year-on-year. It does have some impact around there, but the higher COVID goes, the -- at least -- they tend to be a kind of natural hedge in that, if the lockdowns are tighter, it's usually because COVID testing and COVID incidences is significantly higher. And that sort of dramatically offsets it. And then the BAU tends to come back pretty quickly once COVID numbers start coming down and lockdowns start to ease.

The next question comes from Andrew Goodsall with MST Marquee.

Just continuing the conversation around the PCR outlook. And we track sort of headline PCR volumes, so I'm just trying to understand if you're seeing any variation to those volumes; or whether they're a good indicator just in terms of things like the capacity that you're adding; whether that outpaces the public capacity add; or whether you're seeing any variation state by state; whether you're making, I guess, a more significant commitment or if you have better exposure to some of the regions where the virus is in higher circulation. I'm just trying to understand those variations and where you [ sit versus sort of the market ].

Yes. Thanks, Andrew. Look. You know what, we've probably got the same crystal ball that you have, so we have a bit of -- we try to make an estimate of where we think this is going to go. And I honestly don't know any better than anybody else as to where this goes, but it looks like the Delta, at the very least, is extremely difficult to control the growth of in any of the jurisdictions where it's become established. And our expectation is that there is a pretty reasonable chance that Delta numbers in Victoria will continue to grow like they are in New South Wales and that New South Wales will continue to grow. And yes, we're getting used to 1,200 cases a day now, but it's -- the R factor is somewhere between 1.1 and 1.3. So if you just factor that in, over time, you get to 2,000 and 3,000 pretty quickly off the back of that. And let's hope vaccines do cut in at some point and reduce numbers like we think they will, but if that's the case and the numbers do keep increasing like that, we think we'll start to see in Victoria similar numbers to New South Wales. And numbers in New South Wales will probably continue to grow. So we've -- New South Wales has been doing 110,000 to 130,000 tests a day. If you start to get to 2,000 and 3,000 cases a day, maybe that needs to go to 180,000, 200,000 a day. So we've taken the view that we need to invest in the potential for that in terms of providing for that sort of capacity. With a bit of luck, we -- as a country, we don't need to use it, I guess, but now is the time to invest in that if it's going to be needed at that point down the track.

With those investments, I guess what I'm trying to get at, would they put you slightly ahead of the sort of headline numbers that we can access every day? That investment, do you think, [ put you as the ] bigger contributor to that -- those test rates. Or just in-line...

Look. It would if we're the only ones doing it. My guess is we're probably not the only ones doing it in terms of increasing capacity to do this, I think. When you get close to the limit of capacity, we need to provide some buffer for surge increases over time. So look, we have been doing a lot of the COVID testing in New South Wales, so we've been carrying a -- probably a bigger chunk than our market share of that, I think, is fair to say, but...

Thinking also a lot of the publics we're seeing are getting [ capped out a bit ], so I'm just trying to sort of -- if that's flowing, then your piece of the puzzle was bigger potentially.

We're -- we've been asked to take on a lot of volume out of New South Wales health, yes. So yes, as well as what we're getting.