Australian Clinical Labs (ASX:ACL) executives said the company delivered improved profitability in the first half of fiscal 2026 despite a softer pathology market, Medicare fee changes and inflationary wage pressures, pointing to portfolio rationalization, technology-driven productivity initiatives and expanding upfront billing as key drivers.
First-half results: earnings up despite lower revenue
Group CEO Melinda McGrath said first-half performance reflected “improved underlying profitability, margins, and EPS growth” in a challenging operating environment. Revenue for the half was AUD 365 million, down 1% from the prior corresponding period, which management attributed to a combination of weaker GP-referred volumes, Medicare cuts to vitamin B12 testing, and deliberate exits from unprofitable collection centers and commercial contracts.
Revenue headwinds: GP volumes, B12 fee cuts, and ACC portfolio changes
Management spent considerable time explaining why revenue underperformed the broader Medicare-reported market. McGrath said reduced attendance at GP practices had been the biggest driver of slower GP-referred pathology volumes, while Medicare fee cuts for active B12 and other testing were only partially offset by indexation.
She also emphasized that ACL’s revenue comparisons versus market growth should be viewed through the lens of profitability, arguing that a “not insignificant portion” of market activity is unprofitable. The company said it has restructured its Australian Clinical Collection (ACC) contract portfolio and exited certain loss-making collection centers and commercial contracts where costs exceeded revenue. McGrath said ACL had also pulled out of “a couple of contracts” that had become a drag over time, noting other providers may have assumed some of that work.
CFO Matt Cordingley said the earnings uplift was driven by the closure of loss-making ACCs, workforce productivity initiatives and “AI-enabled productivity improvements across our lab network,” which together more than absorbed broader cost inflation, including wage increases under modern awards and higher superannuation contributions referenced earlier by McGrath.
Technology and productivity: billing digitalization and AI-assisted processing
McGrath highlighted ACL’s single national laboratory information system as a competitive advantage, saying it reduces duplication and allows changes to be deployed across the country. She cited several operational improvements in the half, including:
- Labor as a percentage of revenue remaining at less than 44% despite wage inflation and softer revenue;
- Lab operational efficiency rising 10%;
- Logistics efficiency increasing 13%;
- Consumables as a percentage of revenue decreasing 40 basis points to 17.4%;
- Final testing underway of AI to enhance back-office functions, including manual data entry processes, with savings expected “into 2026 and beyond.”
McGrath said ACL has implemented digitalized upfront patient billing for unfunded tests, improving average fees and reducing bad debt write-offs. She said collections on these amounts have improved from 65% to 95%. Cordingley later explained that upfront collections reduce receivables and should, over time, lower provisioning and support cash conversion.
On automation, McGrath said electronic requesting was at 18% utilization and integrated with clinic software and more than 39,000 referrers. She also described the company’s use of AI-assisted optical character recognition to read pathology request forms, saying more than 50% of forms fit the current version with accuracy “better than humans,” and that the system continues to learn. ACL also cited route optimization software delivering a benefit of 150,000 km per month across the group and reducing “futile stops” by 50%.
Cash flow, capital returns, and balance sheet
Free cash flow before interest, tax and financing was AUD 21 million, excluding a one-off AUD 6.2 million AIC settlement payment. Cordingley said operating cash flow remained robust, representing 95% of cash EBITDA, and noted a small working capital outflow that management expects to reverse in the second half.
During the half, ACL returned AUD 27.8 million to shareholders through dividends and buybacks, which management described as around 6% of current market capitalization. The board declared an interim dividend of AUD 0.0375 per share, representing 55% of first-half underlying NPAT, with a record date of 13 March 2026 and payment scheduled for 31 March 2026. Management said it expects to continue the buyback in the second half, while maintaining flexibility between dividends and repurchases.
At the end of the half, cash was AUD 22.4 million. Net debt excluding lease liabilities increased to AUD 49.8 million, which Cordingley said reflected the AIC settlement, AUD 10 million of buybacks, and the AUD 17.6 million final dividend for fiscal 2025. He said leverage remained conservative at less than 1x EBITDA, with bank facilities maturing in July 2027.
Labor, compliance matters, and outlook
Cordingley also addressed a disclosure about historical employee underpayments, saying the company discovered issues with the historical calculation and payment of certain entitlements. He said payments, including interest, have been made to all identified current employees, and ACL has begun contacting former employees. He said the company self-reported to the Fair Work Ombudsman and is cooperating as the review continues. In Q&A, management said it could not yet determine whether additional underpayments would be identified; if further costs arise related to prior periods, management said they would be taken “below the line.”
McGrath discussed the Fair Work Commission’s findings on gender-based undervaluation affecting awards covering pathology collectors and health professionals, noting that some increases and reclassifications are still to be codified in a final decision. She said ACL is mapping the impact for 2027 and will update the market once complete. McGrath added that the scale of wage increases could require government support through investment in the Medicare schedule to avoid impacts on employment, patient access and service levels, while noting the company plans to pursue operational mitigations if support is not provided.
On market conditions, management said the tripling of the GP bulk billing incentive that commenced in November 2025 has begun to show an impact on bulk billing rates, with Medicare data cited as showing BBI growth of 66% in November and 84% in December. Executives said pathology growth remained below long-term averages due to reduced GP attendances, but they expect GP visits to rise over the next six months, with pathology volumes likely to lag as referrals flow through.
In Q&A, Cordingley said November and January were “unusual” months for volumes, with February “looking a little better,” and described early “green shoots” in GP attendances. Management also reiterated that ACL typically experiences a second-half skew due to working days, seasonal appointment patterns and referrer cadence.
McGrath said the company updated guidance to reflect subdued first-half market conditions and expected second-half growth, taking into account January and February performance to date. She also said ACL expects at least AUD 8 million of additional EBIT in fiscal 2027 from initiatives discussed, and outlined longer-term efficiency projects including a “lab of the future” concept with a progressive rollout through 2027 and 2028.
McGrath closed by noting she has advised the board of her resignation, effective 30 August.
About Australian Clinical Labs (ASX:ACL)
Australian Clinical Labs Limited provides pathology services in Australia. The company offers range of services, which include routine pathology test, advanced molecular genetics testing, harmony NIPT and first trimester screening, genetic carrier screening, chemical pathology, histopathology, and cytopathology; hematology, allergy, and immunology; serology and microbiology; and infectious molecular testing, cardiac testing services, functional pathology, veterinary pathology, and commercial drug and alcohol testing services.
