HEALIUS LIMITED — Capital/Financing Update 2020

Dec 8, 2020

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Investor Update 9 December 2020

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Trading Update

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Tradin u date g p

Strong performance with volumes improving

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PATHOLOGY

• Continued strong growth in revenues in Oct and Nov driven by a mix of COVID-19 testing volumes and on-going recovery of non-COVID-19 revenues

• Community COVID-19 testing remaining broadly within band of 7,000-10,000 per working day

• Commercial COVID-19 testing continuing to grow

• Non-COVID revenues trending up to be flat year-on-year

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IMAGING

• Sustained growth in revenues in all states in Oct and Nov, driven by both volumes and average fee, other than Victoria and SA

• In Victoria, activity returning rapidly with the easing of restrictions and revenue above pcp in Nov

• In SA, COVID-19 related shutdown temporarily impacted revenues in Nov but ahead YTD (albeit a small part of the imaging business)

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DAY HOSPITALS

• Revenues for the division materially ahead of pcp in Oct and Nov

• Montserrat delivering good returns with Westside at record levels

• Adora Fertility performing well with record cycles in Nov

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Capital Management

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Medical Centres sale com leted p

Sale proceeds of $483m received including full Dental deferred consideration

Medical Centres sale completed

• $483m proceeds representing $500m enterprise value adjusted for future earn-outs to be funded by BGH Capital, movements in working capital and buyer costs

• Dental deferred consideration of $75m has been received in full given strong trading in that business this financial year

Long-term diagnostics sub-leases

Group support costs to reduce by >$15m

• Healius will continue to operate its existing pathology collection centres and imaging facilities located within the medical centres under long-term sub-leases at rents consistent with historic levels

• On-going services provided to Medical Centres under transitional services agreements include:

  • Accounting and payroll

  • IT services

• The majority of sub-lease agreements are for a minimum of 7 years and formalise current service levels through service level agreements

• For most sites, Healius has the right to two or three further 5 year extension options beyond the initial sub-lease period

• Property services

• Expected exit on most of these services by June 2021

• As announced, Healius plans to reduce Group support costs by $15m by FY22 to offset costs related to support services previously provided to Medical Centres

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Stron ca ital osition g p p

Capital management plan to facilitate strategy, optimise shareholder returns and manage uncertainties

Capital management review: Objectives

Key implications

• Meet capital needs of portfolio and business improvement strategy including margin improvements

• Sufficient headroom for immediate and medium-term growth scenarios

• Eliminate excess or unnecessary debt facilities and hedges

• Optimise cost of funding

• Sustainable dividend policy providing certainty to shareholders and flexibility to the business

• Buffer for future shocks

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1
On-market share buy-back
2
Revised dividend policy
3
Reduced gearing
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Reduction in debt facilities
5
Strategic capital investment plan
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On-market share bu -back y

Up to $200m to be returned to shareholders through on-market share buy-back in CY21

On-market share buy-back scheme

• With the large capital envelop and cash generation expectations, we can return funds to our shareholders

• Board has approved an on-market buy-back of up to 10% of the Company’s voting shares

• Within the 10/12 limit permitted by the Corporations Act 2001

• Return of up to $200m in CY21 dependent on HLS share price and market conditions

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2

Dividend a out olic p y p y

Revised dividend payout target of 50 - 70% of reported NPAT

Dividend payout policy reset

• Range allows for an optimal balance of investment, gearing, sustainability and returns to shareholders

• Provides certainty within a range for shareholders

• Flexibility for the business based on in-year investment and capex requirements

• Sufficient franking credits to support fully franked dividends under this policy

• Set at 50 – 70% of reported NPAT, aligning with targeted reduction in adjustments between reported and underlying NPAT

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3

Reduced earin g g

Moderate gearing target of 1.7x - 2.2x

Medium-term (FY22-23) gearing target 1.7x – 2.2x

• Optimise overall cost of funding (WACC) utilising cheaper debt

• Meet capital management plan objectives:

• adequate capital headroom for capex and sustainable dividend payments

• buffer for downside market scenarios

Gearing expected to be at target by FY22-23

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2.7x 2.7x
2.4x
1.7x - 2.2x
<1.0x
FY18 FY19 FY20 Current Target
FY22-23
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4 Reduction in debt facilities

Reduction of debt facilities in line with gearing targets

Reduced debt facilities

• Syndicated debt facilities to be reduced by $295m from $1,095m to $800m

• Consistent with new target gearing of 1.7x to 2.2x

• Will yield annual interest savings of $2.9m

• Leaves sufficient debt headroom for planned business investments and share buy-backs, as well as any significant unplanned market events

• Ineffective interest rate swaps to be closed out with expected ~($6m) impact on continuing operations reported NPAT for FY21

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5

Strate ic ca ital investment lan g p p

Sufficient capital headroom and strong free cash flow to fund strategic portfolio investments and value creation

Capital Investments

Portfolio Dev: Day Hospital

• Portfolio

• development  Larger multi-specialty “Westside and value Privates” rolling-in smaller sites creation  Potential OpCo / PropCo model to increase investment capacity

Portfolio Dev: Diagnostics

• Selective roll-ins

• Bolster domestic positions and scale

Value Creation and Infrastructure

• LIS modernisation to run through to FY24 - expected investment on top of BAU capex

• On-going SIP expected investment to deliver program benefits

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Maintenance and growth capex profile
Major Items
$’m
 Equipment 234.8
BAU  New and refurbishment of sites Significant reduction in capex
67.3 requirements post Medical Centres sale
maintenance  Laboratory fit outs 127.3
and growth  Courier vehicles 86.6 5.2 11.0
55 - 75
42.8
 BAU technology 20
80.9 68.3 55
 BAU projects
2019 2020 Ongoing
Coastal acquisition Medical Centre
Montserrat acquisition Continuing
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Sustainable Improvement Program

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SIP and mar in mana ement u date g g p

$58m in annualised benefits delivered to-date in continuing operations ($44m[1] at 30 June 2020)

Annual Run-Rate SIP Saving[1] , $’m

58 Total Category Key initiatives	58 Total Category Key initiatives
Total
Pathology	29  Regional lab rationalisation  Support role consolidations  Commercial COVID-19 revenue  Labour initiatives $17m  Consumables $5m  Other $7m
Group Services	16  Management redundancies and outsourcing  Rationalisation of IT resources  IT security in-sourcing  Telco contract management  Labour initiatives $11m  Other $5m
Imaging	13  Labour initiatives $10m  Consumables $2m  Other $1m  Voice recognition technology  Shift to zero film  Head office role consolidations

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1 Continuing operations only, exclusive of Medical Centres; compared to $37m FY20 in-year savings and $54m in annualised run-rate savings (incl. $10m in discontinued businesses) reported in FY20 Full Year Report

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Current and future SIP sco e p

Current initiatives prioritised through 4 themes to deliver over 300bps in EBIT margin improvement by FY23

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Digitisation Work Force Management
 Standardise and automate processes  Improving performance management
 Digital self-service options for and incentives
customers  Better people capabilities and skills
Work Force
 matching
Digital operating models Digitisation
Management 
 Rostering, and supply and demand
Analytics and data-driven
management
optimisation
 System and architecture
modernisation
300+ bps
margin
Network and
Segment
Sourcing
Optimisation Sourcing
Network and Segment Optimisation  Re-tendering key spend areas
 Rationalisation of physical network  Reduction in external spend
 New commercial opportunities  Improved category and demand
 Branding and value proposition management
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• Relationship management excellence

• Supply chain improvements

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FY23 Plannin scenarios[1] g

Group-wide SIP expected to deliver incremental ~$80m on earnings by FY23 above BAU

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Pathology
180 - 190
48
20 - 33
111
FY19 BAU [1] SIP [2] FY23
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Imaging
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60 - 65
38 5 - 8 19
FY19 BAU [1] SIP [2] FY23
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Key SIP Initiatives

Labour management Labour optimisation across labs, pre-analytics and data entry / support functions

Network optimisation National coordination of footprint strategy based on refined site profitability model

Commercial Increased penetration of non-traditional pathology revenue streams and non-MBS revenues

Sourcing, logistics and supply chain Reduction in per episode external spend, and optimisation of warehousing and logistics operations

Customer digitisation Digital optimisation and developing an integrated digital experience for the end-to-end referrer and patient journey

Work force management Improvement in work force skills and efficiency through staff performance and competency management, and improved incentives programs

Rostering Better matching of supply and demand through new rostering tools, algorithms and clinic opening hours

Specialist market Improving specialist value proposition and engagement to deliver a more representative specialist market share

Expected program upfront implementation costs are ~$12m p.a. costs (opex and capex) from FY21 – FY23

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1 Scenario assumptions: Low range: 3% Path and 2% DI p.a. revenue growth; High range: 5% Path and 4% DI p.a. revenue growth; 14% Path and 10% DI EBIT margin on incremental revenue; Exclusive of inorganic growth; pre-AASB16 2 Net of on-going operating expenses

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Laboratory Information System

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Laborator Information S stem y y

Our approach to LIS modernisation is based on five key principles

Principle		Description ▪ LIS not to be fully dependent on a single software and vendor; instead benefiting from new API based integration layer to connect to best of breed solutions ▪ Using cloud-based and vendor-supported open-source solutions where available and reliable; also ensuring flexibility/expandability to allow for potential future business expansion ▪ Ensuring the LIS approach to be used allows for a fully-integrated Pathology organisation, with corresponding benefits (e.g., inter-lab optimisation) ▪ Staying ahead of the curve by investments in Digital Pathology solutions, latest Genetics applications and other IT enabled innovations ▪ Ensuring an efficient and low-risk balance between in-house and vendor-supported capabilities
Modularity in selection and implementation
Extensible architecture for growth
Integrated system for an integrated organisation
		▪ Staying ahead of the enabled innovations
Investments in distinctive capabilities
		▪ Ensuring an efficient
Sustainable solutions and partnerships

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LIS Pro ram Investment g

Total of $85m - $90m will be invested for an annual benefit of $15 - $20m from FY24

LIS cost and benefit profile

• Full LIS modernisation to run through to FY24

• Expected cumulative incremental LIS investment for FY21-FY24 to be approximately $85m - $90m

• Several activities have already commenced (e.g. external integration layer, vendor selected for eOrdering solution)

• Net run rate benefit of LIS investment expected between $15-20m EBIT p.a. (FY24) through:

• Direct and indirect benefits of an integrated SDS, including interlab optimisation

• Productivity improvements as well as commercial opportunities in certain areas (e.g. genetics)

• Labour efficiencies due to reduced need for maintenance of legacy systems

• IT operating model to adjust based on new LIS set up

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Release of this Investor Update to the ASX has been authorised by the Board of Healius Limited