Integral Diagnostics Limited (IDX.XA) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Integral Diagnostics FY '25 Results. [Operator Instructions] I would now like to hand the conference over to Dr. Ian Kadish, CEO. Please go ahead.

Thank you very much. My name is Ian Kadish. I'm the Managing Director and the Chief Executive Officer of Integral Diagnostics. I'm joined here this morning by Craig White, Craig is our Chief Financial Officer. We're pleased to be talking to you today about Integral's results in financial year 2025. We 2025 was a transformational year for us. We undertook the biggest merger in the radiology industry and created [indiscernible] second largest radiology provider with 145 clinics in every state of Australia and in the greater Auckland region of New Zealand. We grew our revenue by 33.7% to $628 million, including a contribution from capital for 6 months. On a stand-alone basis, IDX revenue grew by 6.7% year-on-year. We improved our operating EBITDA margin by 20.1%, up 0.6% versus 2024. And we delivered exceptionally strong growth in diluted earnings per share of 32.9%, and we increased our dividend by 21.2%, respectively. The capital merger synergies are materially above expectation. We're now expecting $14 million to be delivered on an annualized basis. This is compared to the $10 million, at least $10 million that we had estimated. And we have delivered and realized $7 million of that synergy in the first 6 months. We have a strong balance sheet with reduced leverage at 2.6x at the 30th of June 2025, and 2.4x if you include our pro forma annualized synergies of $14 million. We're already realizing strategic benefits from the merger across teddy radiology across procurement and employee engagement and there are further benefits still to come. We're very well positioned at this point to capitalize on industry trade tailwinds and to drive further margin expansion with revenue growth. The tailwinds include deregulation, and national lung cancer screening program, where we're already seeing the benefits from those 2 and the GP bulk billing practice incentive program, which will be expanded later this calendar year. We're delivering better outcomes for our patients. Our NPS score is 82, and we have strong refrain strong radiologist engagement. Turning to 3 major progress updates that I'd like to talk to. The first is capital merger, where we are proceeding on plan and synergies exceeding our initial expectations and strategic benefits are already realized. We have our new organizational structure in place. The annualized ongoing synergies are expected to be $14 million and $7 million has been realized already. Our procurement function has been established and we're driving savings over and above the initial synergy projections. And our increased teleradiology scale with contribution from the capital radiologists has been particularly helpful. and we have generated strong employee engagement scores across both entities. In terms of like-for-like organic growth, we're going to continue our focus on driving organic growth and operational efficiencies, including radiologist recruitment and productivity and efficiency to support our growing demand for services. an increased focus on teddy radiologist recruitment to grow our leading teleradiology platform. We now have 114 teleradiologists at IDXt. This is up from 80 that we had at the same time last year. And we're going to continue driving additional operating expense and CapEx savings. And we're also keeping one eye on growth with greenfields. We opened 5 greenfields in the last financial year. 3 brand-new greenfields in Spotswood, in Victoria, in Glenorchy, Tasmania and in Noosa on the Sunshine Coast in Queensland. We also relocated facilities to new comprehensive state-of-the-art facilities in Ocean Grove and Smith Street on the Gold Coast, Ocean Grove in Victoria and Smith Street Nuclear Medicine & Women's Imaging Center at the entrance to the Gulf Coast. And we're continuing to evaluate M&A opportunities as they arise because industry consolidation will continue and the capital merger has been an example for us of the benefits that scale does provide. Moving to the next slide, where we will look at the scale and the operating platform that has been strengthened considerably since the merger of capital. We have 145 clinics across Australia and New Zealand with 460 reporting radiologists and about 3,000 staff. We're continuing to develop subspecialty reporting using AI enhanced screening and detection modalities, and we're continuing to invest in high-end modalities, including MRI and PET/CT. We will continue to focus on radiologist recruitment, productivity and efficiency. We'll continue to use IDXt teleradiology or more comprehensively across the business and to use AI as the benefits of AI become more compelling, not only in terms of clinical delivery, but also in terms of efficiency. And we will continue to leverage the scale that we now have in procurement, in IT, in recruitment and in property to generate efficiencies. We'll continue delivering on our values as we did in FY '25. The absolute average patient NPS of 82, we serve 1.8 million patients in the year, performed more than 4.1 million exams, and we invested about $55.3 million in CapEx, including $27.3 million in growth CapEx. We have 460 reporting radiologists and a significant number of these radiologists are also shareholders in our business. And we're growing IDXt and broadening our footprint across the group of subspecialty areas, assisted by our AI-enhanced screening and detection capabilities. We now have a little over 3,000 employees across the business, and we see strong engagement scores across the business annually. Our annualized merger synergies are in excess of what we had projected, more than the at least $10 million that we had indicated. Revenue and EBITDA improved nicely. Increased operating NPAT by 74.4% to $31.6 million in the year, and we've declared or $0.04 dividend fully franked final dividend. We will continue to deliver on our ESG strategy, and we'll continue to embrace change. In fact, that the most notable example of our embrace change value that we have is the one team that has been created across the ex capital personnel and IDX. The merger has been almost textbook like in its planning and its implementation with regard to integration as well. And we really have the one team now focused on what unites us in providing better care together. I'll hand over to Craig now to take us through some detail on the financial performance.

Thanks, Ian, and good morning, everybody. Thank you for taking the interest to join the call. I'll take you to Slide 7 of the investor presentation. Ian has already referenced some of the highlights. But just to reiterate, we saw on a consolidated base as strong revenue growth, 33.7%, with an expanded margin from 19.5% to 20.1%, reflecting a combination of the 2 groups, IDX and Capitol and the $7 million of synergies, and that drove the stronger growth relative to revenue of 38.3%. Just coming a little bit further down the P&L, you can see that the operating EBIT are aligned, we also saw margin expand further to 11.1%, up from 9.8% being a function of depreciation. You can talk to that absent Q&A. As Ian said, the operating diluted EPS was up strongly by 32.9% and the dividend at 21.2%. The dividend growth is slightly lower than the operating diluted EPS, which is just a function of the weighted average calculation of shares on issue in the EPS calculation. Importantly, we've really focused on driving free cash flow in the group and with operating EBITDA up 38.3%, operating free cash flow is up even more strong at 42.9% at $80 million. And that on a combined basis, taking EBITDA and the net debt position has driven a reduction in our leverage from 2.8x at 31 December down to 2.6% on a reported basis at 30 June 2025 or if you pro forma that number for the additional $7 million of synergies that we expect to generate in the first half of FY '26. The pro forma number for leverage comes down to 2.4%, consistent with what we've said before that we expect leverage to decrease gradually over time. Turning you to Slide 8. Slide 8 presents a full year pro forma profit and loss. And I think the key messages here are that, obviously, we've reported in our results, an EBITDA margin of 20.1%. But had we owned capital for the full year, that margin would have been 20.4%. And if you factor in, obviously, the full $40 million of synergies, then that would be I'm sure we'll get into it in the Q&A, but you'll see that on a stand-alone basis, the operating EBITDA margin for IDX was slightly lower. That was fundamentally a function of the reduction in CT reimbursement from Medicare by 2% from 1 November 2024, together with the impact of clinical labor shortages, particularly radiologists and associated cost pressures, especially in the regional areas, consistent with what we've talked to for. Turning to Slide 9 to discuss revenue in a little more detail. You can see that the common Medicare indexation mix and volume has driven solid operating revenue growth in Australia 7.3%. And importantly, when you compare that to Medicare for FY '25, that 7.3% compared to 8.3%, so 1% gap. But importantly, that gap is significantly reduced from the gap that we saw at 31 December for the first half, which was a 2.7% gap. Average fees per exam have increased by a solid 5% being a function of both the price and mix. As we and the industry continues to shift to the higher-end CT, MRI PET scan valleys. Pleasingly, capital also delivered a 7.3% growth. When you adjust for the closure of 4 clinics, the sale of Melton, which was required as part of the merger and an insurance recovery that Capital had in the prior year. New Zealand's growth, as you can see from a revenue perspective, was more muted, and I discuss the detail in the Q&A. Worth noting though that New Zealand is now a much smaller part of the group with capital. Into operating expenditure, I think the key messages here are that you can see the operating expense as a percentage of are down overall individual lines -- you can see the benefit of some of the procurement initiatives that we've put in place following the merger, Gimbals line consumer expenses were 40 basis points lower as a percentage of revenue compared with the prior year. Land costs were 30 basis points higher, reflecting the clinical and in particular, radiologists shortages and labor cost inflation in regional areas. You can see, though, that the labor efficiencies that we've achieved post the merger with capital mean that labor costs as a percentage of revenue have basically come down 2.2% or 220 basis points compared to 1H FY '25. In a similar profile to consumables, equipment costs have come down by 30 basis points. which is a function of some of the procurement efficiencies that we've been able to achieve so far given the larger size of the group. Occupancy costs increased slightly by 20 basis points as reflecting CPI increases embedded in leases and a few adjustments made good provision. On the technology front, we're beginning to see, I think, some of the benefits from the investment that we've put in over the last probably 2 to 3 years in building out our IT platforms, including cybersecurity. So technology costs have come down by 10 basis points on the larger fixed cost base of the group and the overall other expenses decreased by 40 basis points. And that, again, is just a function of an ongoing focus on controlling discretionary expenditure. Turning to Slide 11 and cash flow. As I mentioned earlier, cash flow, operating free cash flow across the year has been strong at $80 million, up 42.9% or expressed as a conversion as -- as a percentage from a conversion perspective, it's at 85.4%, up from 77.2% in the prior year. Turning to capital expenditure on Slide 12. You can see that across the year, total CapEx for replacement capital was $28 million, growth CapEx of $27.3 million, roughly evenly split with a breakdown there, just showing some of the new greenfield sites that we have opened during FY '25. Just touching briefly on Slide 13 on the balance sheet. I think discussed previously the leverage coming down from 2.8x at 31 December. That's 2.6% reported now or 2.4% on a pro forma basis. And we would expect that down trend to continue. Importantly, we maintain significant liquidity headroom under our facilities of just under $120 million. with significant cash on hand at 30 June of $52 million. I'll now pass back to Ian to take us through an overview of the industry and regulatory update. Thanks, Ian.

Thank you, Craig. We're nicely positioned to capitalize on some positive industry fundamentals. The aging population and increase in chronic disease will continue to drive the use of diagnostic imaging, especially given our ability to detect disease early. Medicare DI benefits and services are growing consistently above the long-term trend, and I'll show you the graph on the next page. Medicare indexation for Financial '26 is 2.4%. And the structural shift to the higher-value modalities will continue both in Australia and overseas in the OECD countries where we're seeing the continued movement towards high-speed CT, MRI and PET/CT. Importantly, from July this year, we hold 42 fully licensed MRIs in Australia. That's twice the number of fully licensed MRIs that both groups had individually last year. The national lung cancer screening program from the 1st of July is driving growth in screening CTs and also follow-up growth in interventional CT and pet cities. The health department has committed $264 million to the spinning program over the 4-year forward estimates. It's an outstanding program for patients as well as for us for the industry. The technological advancements we've seen in teleradiology, which currently we provide is about 15% in the work we do. And AI where we have about 10% of the scans that passed through our AI algorithms, enhanced quality of care and also improved labor productivity. The proposed expansion of the GP bulk billing practice incentive program to all Australians with effect from 1 November 2025, will continue to increase GP visits and radiology referrals and particularly in regional areas because of bulk billing and center for the practices in regional areas are 2 to 3x what the incentive is in the metro areas. The expedited specialist pathway for radiologists from the U.K. and Ireland is expected to be implemented later this calendar year. where reciprocity will be provided for their overseas credentials by the Medical Board of Australia and APRA. And the government has also pledged new funds for 400 new nursing scholarships of 2,000 more adopters. Turning to the Medicare graph on the next page. What's notable on the graph is the continued growth of both benefits and services above long-term trend lines, but also the divergence between the services and benefits lines, which continues to be evident and has been growing in recent years. And this is because we're doing a lot more across the industry. We're doing a lot more MRI CT nuclear medicine studies like PET/CTs and relatively fewer of the basic X-rays and ultrasound. And this trend will continue as the medical industry evolves and takes advantage of the technology that's operating this newer diagnostic technologies. Moving to our FY '26 strategy, priorities and outlook. Our strategy remains the same to drive organic earnings growth, including a relentless focus on radiologist recruitment and productivity and operational efficiency to accelerate the use of teleradiology digital and AI to drive our ESG strategy and to continue to lead through our values. We will complete the IDX and Capitol merger integration will continue to realize synergies from the integration. And we will continually look at the market as the market evolves at consolidation in the radiology space continues. Our outlook for FY '26 and beyond is that IDX has a specialist high-quality provider diagnostic services is strategically very well positioned to benefit from the quantitive industry fundamentals and to grow our services strongly going forward. IDX, including Capitol, achieved a 7.0% revenue growth in July on a like-for-like basis with for closed clinics and the sale of the Melton Clinic versus the prior corresponding period. Our revenue growth and operating EBITDA margin is expected to continue to expand further over time, driven by the inclusion of the full $14 million in annualized synergies, the ramp-up of the new greenfield and brownfield investments, most of which occurred in the second half of the financial year. Scale benefits including the increased use of IDXT teleradiology, both internally and externally, together with the procurement efficiencies. And this will be supported by the further deregulation of MRI and the growth of the national lung cancer screening program. We do expect this to be partially offset by ongoing clinical labor shortages and cost pressures, together with an alignment of capital repairs and maintenance accounting policy to IDX. In FY '26, we expect that replacement and growth CapEx expenditure will be between $45 million and $55 million.

We'll turn now to Q&A. And the first question would be coming in from David Stanton at Jefferies.

Can you hear me?

Yes, we can.

Sorry, I'll start again. And congratulations on a very solid result. Look, I wonder if you could give us an idea of what you're expecting for Medicare market growth in revenue terms for F '26 given the puts and takes that we've seen and you've laid out, please?

I'd expect, David, that we'll see continued growth, especially in the higher-value modalities, and the growth will be propelled by the MRI deregulation, where the upgrade of the partial licenses to full licenses as well as the additional licenses that practices like ours are able to add to clinics like Mitic Olympic Park, for instance, where we now have 3 MRIs in place. So we expect that the MRI deregulation plus the national lung cancer screening program will continue to propel or to drive Medicare growth, and we expect the growth to continue to be in FY '26 about the long-term trade.

And second question for me, and then I'll get back in the queue. One for Craig. Can you explain to us a little bit about the capital, as you've called out, the capital repairs and maintenance accounting policy and how that's going to impact profitability into 2026, please? .

Sure, David. So look, as part of the, I guess, the integration of the business and do all purchase price accounting and then looking at the accounting policies. We obviously aligned all those with IDX's existing policies and effectively within the results, so for the 6 months, there would be about $450,000 of repairs and maintenance cost that has gone through the P&L that would not have gone through the P&L for capital on a stand-alone basis. capital accounting policy was slightly different. But I think IDX takes a slightly more conservative approach to expense things within the repairs and maintenance nature. So I guess if you want to annualize that number, it's probably in the order of $900,000 on a full year basis.

And your next question will come from Saul Hadassin with Barrenjoey.

My first question is of the increase in the synergies that you're now guiding to $14 million, can you give some color or detail as to where the extra $4 million comes from? Is it additional cost out on procurement? Are there any revenue synergies baked into that $4 million? Just some context there would be great.

Yes, sure, Saul. So I think as we talk at the half year, the bulk of the synergies were realized at or around the time of the acquisition from a headcount perspective. So within that number of [ 7 ], there will be about $5 million of headcount synergies. They were pretty much in line with what we planned on premerger. It was just a question of realizing -- it's probably a few hundred thousand dollars more than perhaps we anticipated. But that number of around [ 5 ] is what we expected. I think the incremental [ 2 ] is a function of, obviously, the elimination of the listing costs, but more particularly where we've seen the upside has been in procurement. So we had very little in the original $10 million for procurement. And I think as we've gone through the work and the diligence, those procurement synergies have come through higher I talked earlier about the benefits we're seeing in the consumables line benefits of the equipment service line in terms of, obviously, as a larger group, we are able to negotiate better agreements with the equipment suppliers. But we've also seen procurement efficiencies and other expenses, particularly in areas like IT, where costs on a per click basis for reading scans have come down and things of that nature. So it's really procurement where we're seeing the upside. And I think we'll continue to see some further benefits over time. It's just difficult to put a number on it as we continue to sort of, I suppose, leverage our larger scale in the market. Probably just wondering -- so I might touch on just whilst we talk about synergies. The people wondering how if you have $7 million within FY '25, how that annualizes the $14 million on a full year basis, given there's probably a ramp up in that in the second half of FY '25. The reality is that well, firstly, most of those synergies are the same were realized around the time merger in terms of headcount. But there is effectively probably a one-off what we call before an administrative efficiency around billing that's in that second half FY '25 number, that won't recur, but there are then some other efficiencies that are occurring that roughly offset that number so that together to achieve $7 million in the first half and then $14 million on an annualized basis.

Great. That's very clear. And I had one other question as well. You gave the 7% growth rate for July month, but that's normalized, obviously, for clinic closures and clinical. Can you give us a sense of what that growth was on a reported basis for July?

Saul, to be honest, it wouldn't have been too much different because the clinic closures have gotten small. I mean we sold Melton. Obviously, that was a profitable tenth was a required disposal by the HPC. So -- and I'd also say that we've reported 7% adjusted for working days, but that actually the same number on a reported basis. There's no difference on working days.

Your next question will come from David Low with JPMorgan.

Craig, you alluded to the IDX core margin going down a little. Can I get to talk to that than I'm guessing labor is going to form part of that answer as well. So maybe you could touch on what's happening there. And I guess I'm interested to know whether you think there's really any lift at the end of the tunnel on the labor challenges or the labor cost challenge, please?

Yes. Sure, David. So yes, I mean, I think I've called out 2 things that have really driven that slight decline in margin. One being the 8 months of the impact of 2% cut reimbursement, which IDX does -- would have a higher weighting of CT relative to the market and just given that we're more of a specialist provider. So that would have impacted us probably more than some others. So that certainly dampened the margin. And then obviously, this piece around labor costs that we've talked about in terms of particularly radiologists in some of the regional areas, Central Queensland, Western Australia. So then the question, I suppose, is how do we see things going forward? I mean I think a couple of things. One is IDXt has, through this back half, continued to grow. We now have 114 IDXt doctors reporting, and that clearly is a solution to the problem, and we will continue to grow that business. it's growing at the least and twice the rate of the overall business, which really helps thing in terms of reducing costs, but also providing flexibility on where the reporting is required across the group in terms of dealing with reporting. The other thing I think is -- and I'm sure Dan will probably want to talk about this, but you'll see Ian talked in the industry and regulatory update that later this year, there will be an opening up of this expedited pathway for doctors to be able to move from the U.K. and Ireland to Australia. There's a significant remuneration differential between Australia and the U.K., which together with lifestyle and other factors, I think it makes a pretty a pretty compelling proposition. So we think that, that will help not only us but also the industry. And I think those things combined with probably a I think we would expect to see a slowing of probably the growth rates in the reporting contracts in these regional areas, which have been a challenge to service, particularly in the first half of this year. So I think the combination of those things would give us some confidence that the issue hasn't gone away, but it's moderate. And we're dealing with it. And to be honest, in the broader scheme of the overall shape of the revenue growth and margin profile, I think this will become a lesser part of the story.

Just to add to that. Thank you, Craig. The teleradiology business is the win business within our group that is able to continue to attract large numbers of radiologists with an interest in joining us and in joining teleradiology and doing teleradiology with us. We have, I believe, leapfrogged many in the industry with the technology that we now offer in teleradiology, and it makes it a lot more attractive for radiologists to join our group when they're able to use the technology to see more patients within the same amount of time than they could with the older teleradiology systems. So if we look right down at IDXt, we have a pipeline of 20 or 30 radiologists that are looking to continue to join us over the next few months that will increase the number beyond the 114 we have right now, up from about 80 we had a year ago, and we continue to see growth in teleradiologists and a strong demand for the teleradiologist business we have. The other thing about teleradiology is that the larger amount of work you have, the more you're able to provide radiologists with the scale and the subspecialization opportunities that they're not able to get with smaller groups. It also gives us the ability to continue to start 24/7 and to have redundancy to service the hospital contracts after hours by using radiologists in Australia and New Zealand, but also radiologists that are based overseas in Europe and the Middle East. So teleradiology is an important part of our ability to service the growing demand in our industry, and it will be helped by the expedited specialist program where we're going to be providing reciprocity for the overseas credentials in the U.K. and Ireland, that radiologists have and we expect that this program will be implemented during the latter part of this calendar year. Our expectation based on the information we have from APRA and the medical board is that the program should be implemented in the October, November time frame. It has been implemented for other specialty areas other than radiology. So for instance, in OB-GYN and aesthetics as well as GP and psychiatry, the program has been in place for some time, and we're looking forward to it being opened up for radiologists as well. I think that was a very comprehensive answer.

I just -- the only question I otherwise had really is, will the income in U.K., Ireland radiologist be required to work regionally?

Yes, they will. We'll still be required to work for up to 10 years in regional areas. That will not change from the current requirement.

Your next question will come from Steven Wheen with Jarden.

Just a few questions for you. I wonder you've given that revenue inside into July. I wonder if you could just talk to specifically and what you're seeing on that front now that you've got a month worth of experience. I appreciate it's not very long, but just sort of give us some color around what happening post that deregulation?

Thanks, Steve. So MRI utilization has increased quite nicely since the deregulation. We are seeing MRI volumes well above where they were historically. We have twice the number of fully licensed MRIs now than we had a year ago. So the MRI deregulation is occurring, I suppose, on track for us, where we expect to be. The -- just moving on as opposed to the national lung cancer screening program would be ahead of expectations, but MRI deregulation is roughly where we expect it would be at this time. I think, Steve, it will be important to look at a longer period than 1 month to really see the full benefit of these programs coming through, even though MRI ranked did kick in on the 1st of July. There is a time period that specialists need to become aware as much work as we've done to make them aware of the MRIs in the area. It's still habits to need to change and referral patterns need to change and we'll continue to see, I believe, extra volumes coming in from MRI, and particularly in Australia, where historically, our MRI utilization relative to the rest of the OECD has been a lot lower. So the deregulation is going to help put us on a par with the rest of the developed world in terms of providing our patients with access to this very useful technology.

Great. I wonder if I could drill down a little bit further. I mean I noticed that you -- apart from the partials moving to full MRI license, you had 2 sites where you brought in a brand-new machine to take advantage of the new structure at Olympic Park and John Flynn. Were they part of this revenue growth that you've quoted for July? And if not, if you've seen is the utilization of those new machines given you went ahead in terms of your numbers? Are you still seeing -- are you seeing that they are being well utilized within the site that you put them into?

John Flynn has done very well. So the new math there is the beating expectations. Imaging Olympic Park, we did run into a slight technical issue having 3 MRIs next to each other. And we did need to resolve some of those technical challenges, I suppose, having the 3 magnetic fields so close to each other. And ran into some issues during the month of July, such that for most of July, we only had 2 of the 3 MRIs operational. Imaging Olympic Park, as you know, is a very high-volume site. The MRIs they do between 40 to 50 patients a day, almost every day of the week. So being down one MRI for most of the month at IOP. That site meant that we were not meeting the, I guess, the projected volumes that we expect to get from imaging Olympic Park for the rest of the year. It's important to note though that Imaging Olympic Park would be one of the few sites anywhere, especially private sites that have 3 MRIs on 1 site. So there was some learning in place that needed to occur to ensure that the 3 MRIs could all work well next to each other. But that's in place now. And as of today in this month, during the month of August, we have 3 MRIs fully operationally Imaging Olympic Park, probably more MRIs than any private practice has on any one site in the country.

Great. Okay. Next question I had was just with regarding your reporting contracts. I mean, some of those were reset. And I'm just curious as to what the volume or the utilization of those contracts looks like and whether or not there's a chance that you might for the next term of those contracts push up against that cap where it's sort of impose some margin pressures at the back end of the year or back end of that contract?

We've continued to see pretty strong growth in the public sector hospital contracts. It helped us, for example, in Queensland, where the contract we set on the first of July. And the growth has been within the parameters actually increase that we will be receiving in that contract to reimburse us for that strong additional growth I would expect that, that growth at some point over the course of the next year has got to temper a bit and become a lot more normalized. In fact, if you take a look at the Medicare numbers in the second half, you'll easily be to see that the Medicare numbers have not grown as strongly as they did previously, and a lot of that strong growth in Medicare has come about from the public hospital EDs that had historically seen such very strong growth. So I would expect over the course of the next year that we would see that growth cater off. But very strong growth overall.

Yes, which obviously has benefits from a margin perspective because you're not reaching that cap. Is that correct?

That's right.

Yes. Last one, just with regards to your CapEx in the year. It came in a touch -- well, we came in at about [ 55 ], and I think you've been guiding to [ 60 ] to [ 65 ]. Just interested in what -- where you achieved some savings there? And I guess, similarly, we had expectations that CapEx would be of a similar order going into '26 and where you're getting some savings there as well based on your guidance.

Sure, Steve. I'll take that one. So look, I think, first of all, just to be clear, the CapEx actually spent was around [ 55 ] with IDX and Capitol on a combined basis. but only remember for the period that Capitol was under IDX ownership. If you actually pro forma that to look at it in terms of what IDX and capital spend for FY '25 was on full year, that number is around [ 65 ]. So it came in at the top end of that range that we referenced at the half year. So hopefully, that clarifies things for FY '25. I think for FY '26, we're guiding to a lower number of [ 45 ] to [ 55 ]. And that's really a function of probably just leveraging the existing installed base of equipment that we've now got across the clinics. We've gone through a detailed analysis of where we've got capacity in our machines. And so there's just an opportunity for us to increase utilization, move patients where we might have waitlist in 1 clinic adjacent to link where there's capacity on the machine. So I think that we're pretty focused on looking to install return on invested capital. And so the capital spend in FY '26 will be a little bit lower. So hopefully, that helps.

Yes. That's very clear. Sorry, I did say that was the last one, but I did think of one just now. On your interest, you mean you've obviously the degeared through the acquisition. I'm just wondering if you can give us any insight as to what sort of effective interest rate we could expect now that you start moving down the grid with your lenders?

Sure. So probably the way to answer that is, you'll see in Note 28, we talked about effectively the effective interest rate on the debt. The debt facility was 6.24% for FY '25, that was down from 7.3% in FY '24. Since then, obviously, at the time of the merger, we did refinance. So coming into FY '26 the interest rate is lower as a function of, firstly, the base rate reductions that the RVO put through, but also the lower margin we've negotiated. So I would guide you to a number that's probably 0.5% to 0.75% lower than that 6.24% for FY '26, that's obviously based on current interest rates as today. And what the RBA does in the future will determine where it really lends. So certainly, we'd expect to see that interest expense come down. I might just also whilst we're talking interest just perhaps clarify that when you look at in the supplementary information in the investor pack on Page 24, you'll see a breakdown there for depreciation and finance costs between true depreciation and plant equipment and right-of-use assets and then the interest expense on the debt of the is right-of-use assets. So I just want to talk a little bit to the purchase price accounting and the impact that that's had financials. So obviously, we've had to fair value all the assets for capital coming into the group under AASB 3. But we've also, as part of that process had to effectively restate capital leases to the incremental borrowing rate at the time of the merger. That rate was about 6%. But importantly, that rate was quite a bit higher than the interest rate when the interest rate at the time of capital original for these on balance sheet. So the effect of that is it's increased the finance cost for the right-of-use assets, and you can see that on that slide. Now there's also -- there is an offsetting impact to that because -- that's part of that same exercise, IDX basically brings all the capital leases on both for the initial term release, but also for any options. The impact of that reduced depreciation. So if you were to look at the impact of the higher interest offset by lower depreciation of both roused assets and plant equipment you're probably looking at about $1.5 million impact for the half year on a net basis in terms of a net increase in costs. So the reason I'm covering that is, on the one hand, we've got a real interest expense on the debt coming down, but we have got that slightly higher net cost as a result of the purchase price accounting.

Your next question will come from Craig Wong-Pan with RBC.

I was going to ask a question on why the revenue growth in July has only been 7%, but I think part of that's due to one of your MRIs being out for most of July. I mean are you able to split out what kind of benefit you have seen from MRI deregulation and lung cancer screening program in that month of July?

Yes, we haven't provided Craig the detail behind MRI deregulation growth specifically or lung cancer screening. But suffice to say that during the month of July, we did not get the full benefit from MRI deregulation. And lung cancer screening, even though it came in above expectations. We did expect and did see that the initial demand has been growing. So I expect that as the lung cancer screening program becomes better known and better marketed by government as well as the industry, we'll continue to see growth, at least that's what the overseas experience has been, just continued growth from the initial baseline levels. So I'm not giving any sort of numbers in regards to July, but I can give you a directional trend that we expect for MRI deregulation we will get. Continued growth, especially when the high-volume side of AFP is operating on all 3 cylinders, if you will. And the national lung cancer screening program will continue to grow month-on-month based on our expectations going forward at least for financial '26.

Craig, the other thing just to probably unpack that number a little bit further. Remember, what we've given you is a group number, that's Australia and New Zealand. I referenced earlier that growth in New Zealand has been soft. So if you were to look at Australia only, the number would be closer to 8% for July. And then it would probably be slightly higher still by virtue of the in reference say, the MRI machine IP not being fully operation for this all half.

Okay. That's helpful. And just wanted to drill down a bit more on lung cancer screening. So with other programs you've seen, I mean, this is a multiyear program should we be thinking of this as like a gradual ramp-up in yen and so really kind of year 2 is when you see a lot of that benefit when it patients being screened in that second year? Or how should we think about the first year?

I would expect that we would continue to see a ramp-up throughout the course of financial '26. We will reach a steady take though, steady high stake in terms of lung cancer referrals, where the initial referrals will continue to come in at a fairly high level based on our expectations for the remaining 3 years of the 4-year program. But importantly, in addition to those screening tests, we will then start seeing a lot more referrals for the cancers that have picked up in lung cancer swing program because the reason that's in place is to pick up cancer, and we expect that roughly 3% depending on the study, it does vary, but roughly 3% of those patients seen will have cancer, roughly 15% or more, 15% to 20% will need follow-up studies. So we will -- just in terms of lung cancer screening, we'll continue to see ramp up, at least for this year and then steady state going forward. But then referrals from the program will continue to grow for some years after. A lot of the patients in that program need to come back for further studies. It's just a question of whether those studies are needed in a year's time or 6 months' time or any shorter term on that there.

And then my last question, just on competition, like we had been hearing a bit of competition from bulk billing providers more so in Victoria. But if I look at the capital numbers, they seem to be pretty good. Could you just talk about how that bulk billing business has been experiencing competition or not across kind of the Victorian and the other markets that it operates in?

There's no question that the bulk billing competition in Victoria is higher than it is in other states. But we've not seen any pickup in terms of bulk billing competition, at least not materially across the business. So there are pockets in Victoria that IDX practices or capital practices have been impacted by some new bulk billing competitors over the course of last year with 2. I can't think anything material in the last year, over the last year or 2. But yes, it's been mainly limited to Victoria. There's been some competition, I guess, on the Sunshine Coast as well. But again, it's not material. It's roughly at the same level that it has been for quite a long time.

Your next question will come from Andrew Paine with CLSA.

Congrats on a good result. Just wanted to touch on indexation. So a bit of a step down versus prior year. Just good to get your thoughts around if you see this is a fair level given the current environment. Really wanting to know if you see this is a bit of a margin headwind in the '26, I know there's a few moving parts here reductions in on that, but just if we can drill down on the indexation and the outlook for that?

The indexation number came in roughly where we expected it would be, maybe at the slightly lower end of that range. So we expect an indexation number around 2.5% or thereabout. It came in at 2.4% a little lower than what we were expecting it to come in. But importantly, this year, we do not have the reduction in CT that we had from November last year. So November last year, there was a 2% reduction that was implemented in CT reimbursements as of November 2024 and that hurt our results a little in the second half because we're overindexed to CT. But this year, the 2.4% applies across the -- across the modalities we open.

So if you were to look at FY '25, the 3.5% increases and then 2% cut in CT, I mean on a blended basis, it will equate to 2.7% for FY '25. So remember, that was an environment of higher inflation coming into the year. Obviously, as we go into FY '26, we're going to be looking at inflation coming down. And I think, therefore, the 2.4% that's been set whilst it's probably a bit lower than we were expecting, probably hoping for yes, antenna life.

Okay. That's great. So kind of going forward, it feels like it will be around that level unless there's more offsets or something to consider that?

I mean I think the -- as we understand the way that the government of Medicare think about it is that is a reflection of CPI where C goes, that guides the [indiscernible].

Okay. That's great. And then just on -- just one thing on AI. You mentioned in there that 10% of scans are being done by AI. If could you just see if you can unpack the benefits you've seen from this and what percentage that could lift to over the next few years? And how that's being deployed and supporting the radiologist?

Importantly, Andrew, the 10% of scans are not being done by AI. They're being assisted by AI. So there's a radiologist doing the skins and using AI as a tool, just like they use everyone uses many other tools in the business. AI is just a very important tool and one that's growing in importance, both from a clinical perspective as well as with regard to operational efficiency. I would expect that the use of AI in our industry is going to continue to grow. And I think that now with the lung cancer screening program, we're getting close to a tipping point where AI really efficiency and clinical quality. And the reason that I say that is if you look at lung cancer screening in particular, it's a high-value modality, and it's one that lends itself particularly well to an AI convention. It's very difficult to do lung cancer screening without the use of AI and still make it profitable. whereas what AI does is it reduces the amount of time that the radiologist spends of the scan and it allows us to make a good margin from the screening studies.

Yes. Okay. So that's been the debate for a long time. Is it going to be a decision support tool or to place radiologist I think decision support tools were about landing. So you're kind of implying that the efficiencies to read more scans per radiologists where you're going to get the benefits from?

I think that that's right. I think in the same way as we saw technologies in the past digital technologies and then pack systems allow radiologists to see many more stands per day than they had seen prior to that. I think that AI will do exactly the same thing going forward. In fact, the benefit that we will see in AI may be even more pronounced because it is such a powerful tool.

Okay. That's great. And can I just want to just clarify on the $14 million synergies that you're talking about. Is that all being delivered in '26, up from [ 7 ] in '25 and at another [ 7 ] in '26?

Correct, Andrew.

Your next question will come from Sasha Krien with Evans and Partners.

But just wondering whether or not you think IDX can actually -- as a group can actually outgrow MBS in FY '26, given you seem to have a bit of a disproportionate benefit from the increase in 4 licensed MRIs and you're going to get the bulk billing benefit into the regional areas as well. Is there any reason why you can't grow as fast as or faster than the MBS this year?

Yes. We we're very conscious Sasha to under promise and overdeliver. I do think that we will get closer to the MBS numbers, and there is every possibility that we will be able to do better than Medicare. We have shown in the past several months, if you've gotten closer and closer to the MBS published numbers. Remember that the MBS published numbers also include the public hospital EDs, which have seen an inordinate amount of growth since October, really. But going forward, we've seen that tailor off and we begin to tailor off and we should see continued growth from our over-indexation in terms of lung cancer screening and also in terms of the upgrade of the partial licenses to full licenses and the additional licenses that we've managed to secure through the MRI deregulation on the 1st of July. So we should continue to get closer and closer to the Medicare numbers. And I don't want to promise anything, but all indications are that we should continue to grow strongly and maybe surfing.

Okay. And then just in terms of the CT indexation decline in November, mean how much forewarning did you have on that? And given the really strict growth in benefits at the moment, is there any risk that we sort of hit with more surprise indexation declines over the next 12 months?

That was announced at the same time, Sasha, last year. It was a mine at the same time as the indexation. So we were provided with indexation in FY '24 or for the FY '25 year in May of 2024. That indicated both that we would receive the CPI of 3.5%, but then we were also told that we would receive a 2% reduction from the 1st November that year in CT, which came to a blended average that we calculated at the time of around 2.7%.

Okay. And then just when I look at your operating leverage on a pro forma basis in FY '25, when you back out the synergies, actually get any operating leverage. So OpEx grew faster than sales. I'm just wondering, excluding the synergies into FY '26, can you get underlying operating leverage, given we're going to be cycling some of those still strong top line growth but potentially cycling some of those additional locum costs that you had to wear in first half '25?

Yes. Sasha, I mean, there's a directional comments, not guidance, but I think the short answer is yes, absolutely. We would expect to see that operating leverage come through sort of talked about the fact that -- the fact is the industry is -- has a shortage of radiologists right. So we're in a sense no different. We do have more regional exposure so that creates some dental challenges. But we would expect that to moderate as doctors coming from overseas. We increased the use of IDXt. The rate of growth of some of those remote contract flows, all those things. So as I said earlier, I just think that will become a smaller part of the story overall, and we do expect to get EBITDA margin expansion, absent just synergies.

Yes. Just on the radiologist coming in from overseas, if we get approval in October, November, when do you think you'll actually get radiologists on the ground in regional areas, which will help the shortage?

In all likelihood, it will occur in the first part of the calendar year. So we're ready to go on the back of that program as it is announced we're ready to be recruiting in the U.K. and in Ireland, but we do need to wait for the program to be announced. As Craig indicated earlier, it's a compounding proposition for an NHS radiologist to pretty much double their salary and move to a place where it's a lot more desirable to live. So I expect that the program is going to have some traction. But yes, it won't happen immediately, but we do expect that at the beginning of the calendar year, which is a useful time for people to move with regard to schooling and the like. So we expect to see the first radios come into the program at that time. Radiologists overseas are expecting the program to be -- it's been planned for some time. So they're expecting the program to be announced at some stage. We do have recruiters that are waiting on the announcement, and we'll be ready to hit the ground running as soon as it's me.

And your next question will come from Martyn Jacobs with Bell Potter Securities.

Congratulations on the results. Hopefully, you can hear me because my piece is going to get a charge, but it's well done. A couple from me. I was just wondering on the teleradiology side, you've got 15% of scans now. Can you give some color where you think that might be in the next 3 years or so? And to add to that and have any more additional radios. -- you might be able to recruit into that area over the next -- over that time. And you mentioned 10 to 20 more soon coming. So I was just interested in that.

Yes. I might just -- Martyn, I might just comment that the income, but just so you understand that number of 15%, that is a blended average across IDX and capital. right? So a few years ago, we have been telling you that IDX alone was around being 15%. That number is probably now closer to [ 20 ], if you look at IDX stand-alone. But we've only just really started rolling out IDX T across capital, which is probably sitting around that 4%, 5%. So clearly, if you sort of extrapolate, there's no reason why we can grow IDC to a similar percentage. So I just wanted to sort of give you that breakdown of what's in that 15% as the incoming.

Teleradiology business, in has been growing at a CAGR of about 30% since inception in August of 2020. And we expect that this kind of growth will continue, although as you get larger, the percentage growth is not as high, but the number of radiologists joining continues to grow. It's the one area where there really is a supplier of radiologists because people do like the flexibility that canyradiology offers and the technology that we offence radiology also makes it very attractive for radiologists to join us. So I expect that teleradiology will continue to grow I think at some stage, it will level off and that will be perhaps close to 30%, between 25% and 30%. We might see some leveling off at that stage because you still do need radiologists on the ground to do a lot of the work, the interventional work, the injections and the like that tell radiologists are not able to do.

Right. And secondly, you mentioned that lung screening program, although one month in, is above expectations. I was just wondering if you can maybe give us a bit more color on the I guess the spread of utilization of that program and any other color you can add?

Thanks, Martyn. The beauty of that program is that it's a CT-based program, and it's based on the high resolution high-speed CTs that are now in place and IDX has been acquiring these CTs for it a long time. It's a, CT's our highest-margin modality CT itself, even though lung cancer screening is not as highly paid as some other CT -- CT tests are. It's still a profitable modality and the referrals from the lung cancer screening program also make the program very, very worthwhile. It's a win-win program. It's a real win for patients because disease has picked up earlier when it can be more effectively treated, both more effectively for the patient, but also more cost effectively for the player, and it's a great program for the industry. In fact, where we see the program working in North America and Europe, it's had outstanding success in terms of saving lives, but also in terms of it's driving value for the diagnostic industry and then also to health care more broadly. And the volume that's being driven in is for the earlier detector cancers detected earlier treated far more effectively in every respect that cancer diagnosed late.

One thing I would just to provide you some context that when you look at the 2 programs, the MRI deregulation, the National Lung cancer screening program, you just think about the way we think about in terms of budgeting, we would expect benefit of those extra 16 partial licenses converting the 3 or 4 extra machines, we would expect that revenue benefit to be significantly more incrementally than through the National Lung cancer screening program. SP-5 Yes. And just last 1 for me. .

So you guys, like everyone have had time to plan for MRI deregulation. You mentioned that 1 big parks got to machine up and running now. What have you seen from the editors that willingness to benefit from the deregulation as that industry .

So we've seen good, strong growth in areas where we had -- we're able to I guess, convince the specialists that we were offering a usual modality from the first of July, that they'd be able to use would be very convenient for their patients and they get good diagnostic workups done. So where we were able to brief the specialist well, we saw the programs pick up very, very quickly in some other areas where we've had less access to specialist than before. So for example, our capital historically has been very much a GP-oriented business as opposed to a specialist-oriented business. So it has taken some time for us to work with the capital marketing team with their medical lays on offices and to upskill them to be able to market the specialists as well as -- and as you say, there was ample time to prepare them and much of that preparation was put into place and what's done. But -- but it's still -- when it comes to the 1st of July, it doesn't all happen at the met. The turnover of the legislation to liability. So there is some ramp up, and we are seeing that ramp-up occurring now. There is some -- there are additional fully licensed MRIs out in the market as well. So there would be areas where we would be impacted by additional competition in those areas. But overall, the MRI deregulation program has been a great success for the industry as well as for ourselves.

Right. So no meaningful competitive response at this point, albeit early days. .

Yes. So depending on the market that we're talking about, there are additional competitor MRIs that have been upgraded from partial to 4, but we're not seeing a material impact from that.

Your next question will come from Elyse Shapiro with Canaccord.

Maybe just picking apart the synergies piece quickly with IDXt kind of in the frame of mind. Does the $14 million synergies also assume more fulsome adoption of IDXt across the Catch network? Or is that not included?

No, that's not included, Elyse.

Your next question that will come...

Though it's not excluded the actual synergy number, it is a real benefit because oftentimes, the IDXt radiologists are doing work that would have taken a longer time to report or may have been lost in the absence of having the ability to rely on IDXt to support that extra work coming in. Capital had done very little external key radiology work previously. But the use of some of the IDXt competitors was really immaterial in terms of the savings that we're able to generate by switching capital call radiology from competitors to IDXt.

Your next question will come from Dan Heron with MST Marquee.

Wondering just going back to employee costs again. I'm just wondering how you think about the fair work commission recommendations for [indiscernible] wages and how that sort of fits into your outlook for '26 and beyond?

So we are aware of the fair work recommendations and when they do come in, and we would expect to see some impact, but we don't expect it to be material at this point. And in fact, with the discussions that the industry has been having I think that the impact that we'd be looking at in radiology would not be material in the near term or medium term.

Okay. So to be clear, you have no allowance for any of those increases in sort of the broad outlook you're talking about today?

We do. So we do have allowances in there because we do expect that our wage cost will continue to increase for a number of reasons, but because inflation is lower than it was, and we received indexation again and expect to receive indexation each year. And there are efficiencies that we've spoken about in several other areas, we don't expect it's going to have a material impact going forward.

Okay. So can you put a number to the number you're expecting out of the Fairwork commission increases the recommendations are fairly high?

Yes. A couple of comments I would make. So look, we can't put a number on it. But what I would say is [indiscernible], we generally as an employer payer market, -- so some of those recommendations coming out about an onto IDX. We also have a number of EBAs in place where we have negotiated agreements. And certainly, when you look at this overall, it's just not a big issue in the context of the overall numbers. And I think we'll look at analyst consensus for FY '26, we'd be pre the announcement of this result. We would be comfortable with that consensus number for EBITDA would incorporate anything that you would be referring to.

Our next question will come from Vanessa Thomson with Jefferies.

It's Dave Stanton sneaking on for Vanessa. He's -- just very quickly, because I'm not that smart. Basically, can you give us some directional color for depreciation and amortization in FY '25, you're at about $57 million or calculations. Can you talk to potentially what you expect for 26? And then I've got one more after that, please. .

David, I think, look, again, I can't put a specific number on it. But I mean, I think if you have a look at the numbers we've disclosed on Slide 24 of the investor presentation in terms of pro forma depreciation. I think that's the guidance.

Understood. And is it the same for interest -- net interest expense for '26 as well? Or is that going to step up?

No. I think probably to my earlier comments, I think we would expect to see this is the interest on the debt facilities, not the finance cost, the right of use assets. But if I just look at the debt facilities, we've disclosed the effective interest rate in FY '25 was 6.24%. I'd expect that to be sort of 0.5%, 0.75% lower in FY '26. That's assuming that sort of base rates stay where they are currently.

So compared to the all-in interest expense of, call it, $29 million in '25. Should just broad brush, we be expecting that to go up or down?

So if I look at -- I'm going to reference specific numbers. So Slide 24, the pro forma finance cost of $21.5 million on debt facilities. I would expect that no to come down.

There are no further questions at this time. I'll now hand back to Dr. Kadish for closing remarks.

Thank you very much, and thank you all for your participation and your engagement with us on the call today. We are very excited about what Financial has to offer to IDX and our patients. And we're appreciative of all of your time on the call. Thank you all. .

That does conclude our conference for today. Thank you for participating. You may now disconnect.