Integral Diagnostics Limited (IDX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Integral Diagnostics Limited, IDX, Full Year 2020 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Dr. Ian Kadish, Managing Director and CEO. Thank you. You may begin.

Thank you very much. Good morning. It's great to be here and to be able to share a really strong set of results for what has been a challenging year. My name is Ian Kadish, I'm the Chief Executive and Managing Director of Integral Diagnostics. I'm joined here this morning by Anne Lockwood, our Chief Financial and Commercial Officer. And it's our privilege this morning to be able to share with you a really solid set of results for financial year '20. Integral Diagnostics, as most of you know, is a diagnostic imaging company. We do x-rays and ultrasounds and CT, MRIs and nuclear medicine studies on patients that are referred to us by doctors, GPs and specialists and by other referrers across Australia and New Zealand. Our vision is to build a healthier world, and we do that by delivering the best health outcome for each patient that we see. Our values include putting our patients first always. And by putting our patients first, we also put our shareholders first. We believe in medical leadership in evidence-based care, and making sure that everyone counts in creating value and then embracing change, which for a year that's just gone by, has been a value that we've had an opportunity to put into practice. We've delivered on our values during this financial year gone by. In terms of patients first, we've served 660,000 patients and 30,300 referrers. We performed 1.7 million exams, and we've reduced our adverse patient events to less than 0.03% of the exams that we see. We've also invested $26 million in ensuring that we continue to provide optimal quality care to all our patients, and we've enhanced our cybersecurity and our patient privacy protections. With regard to medical leadership, we employ 196 reporting radiologists, 110 directly as employees and 86 as contractors, 63 of these radiologists are currently shareholders in our business. We were also the first to market in Australia with FDA and TGA approved artificial intelligence applications, including 2 new applications in financial year '20. It's still early days for artificial intelligence, but I have little doubt that over time artificial intelligence will make as much of a difference to the practice of medicine as what the Internet has made to communication. We continue to invest in our relationship with Radiologists Across Borders by providing diagnostic images and teaching material to radiologists and doctors in some developing economies around the world. We make sure that everyone counts in our business, all 1,341 employees. We achieved a Net Promoter Score of 25.5% from our employees last year. This is versus diagnostic industry average of about 15.7%. We reduced our lost time injuries per million by 54% over the past financial year. And we also initiated our formal ESG strategy with a focus on people, community, environment and governance best practice. We also believe in creating value, not just for our shareholders but for all stakeholders. We increased our operating net profit after tax by 21.9% to $31.2 million last year. We increased our operating diluted earnings per share by 4.9% to $0.17 a share, and we paid and declared FY '20 dividends of $0.095 per share. We completed the integration of Imaging Queensland and executed the acquisition of Ascot Radiology in Auckland, New Zealand. We will also importantly included in the ASX300 in June of this year for the first time with 3,892 IDX shareholders. And we embrace change on a daily basis. We implemented an e-referral pilot, including patients and doctor portals that augment the delivery of our results. We enhanced our reporting platform to allow for specialist-specific workflows, and we continued to develop our digital and broader technology capabilities. Turning now to our financial report card. We delivered a 9.5% increase in statutory NPAT to $23 million in financial year '20. We increased our operating net profit after tax to $31.2 million, a 21.9% increase. We increased EBITDA by 20.9% to $64.1 million, and we've increased our operating earnings per share by 4.9% to $0.17 per share. This was all of a revenue -- operating revenue base of $274 million. And importantly, we increased our free cash flow by almost 38% to $55.7 million. We also improved our balance sheet by -- with an 18.2% improvement in our net debt to last 12 months EBITDA of 1.8x, which is down nicely from 2.2x a year ago. A strong balance sheet gives us a lot of comfort in these uncertain times, driven by mainly COVID-19. The significant reductions in patient activity from March to June, driven by COVID-19 and also the lockdowns and other measures introduced because of COVID-19, impacted us most in April. There was some limited improvement in May. And June -- by June, we were largely in line with our pre-COVID-19 expectations. We introduced cost-saving initiatives across our business with the advance of the pandemic early in March across our contractors, across all our employee costs, occupancy costs, equipment and all discretionary spend. As our revenue declined, we managed to reduce each one of these expenditure categories. I'd like to also take this opportunity now to call out to our employees who worked so well with us during this really challenging period. We were fortunate to receive in Australia and New Zealand government assistance, JobKeeper in Australia and an equivalent program in New Zealand, which allowed us to retain and support the highly skilled employees and to position our business to meet demand as it returned. We also declared a fully franked final dividend of $0.04 per share, totaling $0.095 per share for financial year '20. This is $0.10 per share in financial year '19. The decline of 5% reflects our conservative approach to cash management and is reflective of the ongoing uncertainty around COVID-19 and its manifestation. Turning to the next page. We see the impact on the diagnostic industry that COVID-19 has had. A top line on this page reflects the expenditure by Medicare on diagnostic imaging services. And the bottom line on the page is the number of services that Medicare pays for over the course of the last several years, going back to December '14. And as can be seen from this curve, there is the decline in March of this year was greater than anything that has occurred to date. We did see the start of the pickup in the international Medicare rates in June, as you can see the slight uptick in June. And in our business, we did see June getting almost back to our pre-COVID expectations at that time. We did what we said we would do in financial year '20. We targeted some capital investment opportunities that help us to drive organic growth. We've completed our development at the John Flynn Private Hospital, including the development of a new PET facility at John Flynn. This is our fifth PET facility across the group. We now have 2 in Queensland, 2 in Victoria and 1 in Western Australia. And we will, as of next week, when we complete the acquisition of Ascot Radiology, have our first PET in Auckland as well. We installed our second CT at Pindara Private Hospital to capitalize on the upgrade from the partial to the full license that we received on the MRI there. And we completed an installation of a best-in-class Cardiac CT at the St John of God Hospital in Geelong. We also installed a CT in the Bacchus Marsh Hospital in Victoria to service a fast-growing regional corridor. And we relocated our MRI from the Ballarat Base Hospital to the St John of God Hospital in Ballarat, creating a centralized MRI super site that improves the patient experience outcomes and efficiencies, with 2 license MRI side-by-side, one at 3 Tesla machine and the other 1.5 Tesla machine. We completed our Peel Health Specialist Center in Mandurah to service a new oncology service in the region. And we installed a new technology in our MRIs in New Zealand that improves both the quality and the throughput for the 3 MRIs that we currently operate in Auckland. We opened a new site on the Gold Coast at Hope Island that provides ultrasound, x-ray and CT services. We use -- we continued to use digital technology last year to improve the patient and referrer experience by investing in proven AI software. It improves clinical workflows and patient outcomes and we introduced 2 new algorithms to our suite of AI algorithms that we currently use, bringing up to 5 algorithms we use in practices across our -- around our group. We implemented an eReferral pilot, along with patient and doctor portals, to enhance the delivery of results and the consistency and reliability of the service. And we augmented the IDX reporting platform to develop specialty-specific workflows and enhanced our cybersecurity protections. At the North Melbourne Specialist and Research Center, we offered Cardiac CT and wide-bore 3T MRI services to some leading specialists in our area around the clinic, the center of excellence, and we engaged with these specialist referrers to attract their work to our center of excellence. This operation, the greenfield operation in North Melbourne is behind business plan because ramp-up activities there have been hampered by COVID-19. We also invested in recruitment and retention of highly skilled radiologists, clinical and administrative staff. We continue to offer our radiologist equity plan, which was once again oversubscribed. We conducted the -- an entity wide cultural survey that yielded -- that showed us -- demonstrated an NPS score of 25.5, exceeding the industry average of 15.7. We're focused on clinical risk analysis and oversight to provide the highest quality service to patients and referrers. And we continue to promote our values of patients first, medical leadership, everyone counts, create value and embrace change. We integrated our acquisitions, and we evaluated further strategic acquisitions by: integrating the quality Imaging Queensland business into the IDX group; continued the integration of both the Auckland businesses that we previously acquired as well as the Geelong Medical Imaging business to ensure that all synergies were captured; and we focused on new acquisitions in core strategic markets, including the execution of the acquisition of Ascot Radiology in Auckland, which will be completing next week, the 1st of September. We developed our key relationships and helped shape the regulatory landscape by working closely with the Australian Diagnostic Imaging Association. That's our industry's peak body that represents us in Canberra. And Anne Lockwood is a representative of us on the executive of ADIA. ADIA focus on industry solutions for digital health on fixing our radiologist workforce shortages, on effective implementation of Medicare benefit scheme review recommendations that have been made and also to get indexation for nuclear medicine and MRI items that were not included in the CPI increase that we received on the 1st of July for the balance of the tests that we do, about 80% of the tests that we do across Australia. We continued to develop strong relationships with our referrers, with hospital owners, with local and federal members and with key funders. And we continue to promote the benefits of MRI and PET technologies so that they are more widely understood and recognized by patients, by referrers and also by payers. I'm going to hand over at this point to our Chief Financial and Commercial Officer and will ask Anne Lockwood to take us through our financial performance. Please, Anne.

Thank you, Ian, and good morning, everybody. I'm on Slide 9 to take you through the results prior to the impact of AASB 16. Ian touched on the highlights. So operating revenue of $274.1 million, an increase of 18.7%. I want to be clear that, that is a clean trading number. It does not include any subsidies received from government to assist us. So it's been offset by our labor line. So that is a clean revenue number. Our operating EBIT of $64.1 million was an increase of 20.9% on prior year, delivering an EBITDA operating margin of 23.3%, again, which is up on prior year. That delivered an operating NPAT of $31.2 million and operating diluted EPS on cents per share of $0.17 per share, an increase of 4.9%, converting to $55.7 million of free cash flow and a conversion rate net of replacement CapEx of 101.6%. We've reduced our net debt to last 12 months EBITDA to 1.8x, comfortably below 2x, which I know will make a number of you very happy with that number. Turning to Page 10 or Slide 10. This outlines our results with the impact of AASB 16, and I don't intend to go through every line on this slide. I need to show you the upward impact as a result of AASB 16 to our EBITDA was $11.6 million to EBIT was $1.8 million, and there was a declining impact of the impact line of $0.8 million, and that's really driven by the front-loading of the unwinding interest charges, that is required when you apply the AASB 16 sort of technical accounting requirements. What we have included on this slide, you'll see at the foot of the slide is what we expect the impacts today of AASB 16 on our FY '21 results, and that is based on our lease portfolio as at the 30th of June and the leases that we will take over as a result of Ascot acquisition. So I just want to be clear that, that is -- these numbers are based on our current lease portfolio. And unfortunately, changes to the lease portfolio can cause swings and roundabouts in the impacts of the outcomes of applying AASB 16, but that's the best guidance that we can give you at the moment. And I know it's causing a lot of confusion in the market, so we wanted to provide those numbers to give transparency. Turning to Slide 7 -- 11, I apologize. We have the reconciliation of our operating numbers to our statutory numbers. The key call outs there is, obviously, the transaction and integration costs of $4.8 million. That was incurred -- costs incurred from external advisers only. There's no internal costs in that numbers on the acquisition of Imaging Queensland and Ascot Radiology, plus the warranty and indemnity insurance and stamp duty on settling Imaging Queensland. The other number I'll call out there is the amortization of customer contracts of $1.2 million. That was made up of us amortizing the remainder of the New Zealand customer contracts and the Imaging Queensland contracts, which came on as a result of our purchase price accounting from the 1st of November, and that will continue to be amortized at $620,000 per annum for the remainder of its life. And obviously, when we do the purchase price accounting for Ascot from the 1st of September, I don't have those numbers at the moment, but we will have additional customer contract amortization next year as well. Moving to Slide 12. The purpose of this slide is really just to demonstrate the increasing returns to our shareholders and our ongoing growth as we have moved through both the EBITDA and the dividends line. Clearly, this year, for FY '20, we have a decline in the full year dividend of 0.5%, and that's as a result of COVID-19, but we are pleased to have announced a fully franked dividend of $0.04 per share that will be paid on the 1st of October this year for anybody that hold shares at the 31st of August. Moving to Slide 13 and a deep dive into revenue. We did have solid underlying growth, which was driven by our new sites, investment in new equipment and 8 months' contribution from Imaging Queensland despite COVID-19 causing significant declines in revenues from March onwards. So the increase in revenue of $43.1 million for the year was driven by Imaging Queensland contributing $38.7 million, which was well within our expectations when we take into account the impacts of COVID-19. We had organic growth of $4.8 million in Australia or 2.4%, which was offset by declining revenues of $0.4 million in New Zealand due to the impact of the stage 4 COVID-19 restrictions. Our organic revenue growth in Australia of 2.4% and volume declines of 1.7% was slightly lower than industry averages of 2.9% and 1.4%. However, those of you that were with us last year will remember that we significantly outperformed the industry last year by 1.3% and 1.7%, respectively. So we were coming off a very high base. And the Medicare rates also reflect the 52 new licenses that were issued into the market and contribute to those sets for FY '20. So when we take that into account, we're really very pleased with how we performed against markets. Pre-COVID, importantly, we were growing at 7% in Australia organically and 5.5% in New Zealand. So we're delivering really strong growth pre-COVID. Our average fee per exam in Australia, excluding reporting contracts in Imaging Queensland, so it is a like-for-like increase by 1.7%. That's slightly higher than what we would have expected. And that was really because during COVID-19, there was real evidence that volumes of higher-end modalities did not decline in the same proportion as your lower-end modalities of x-rays and ultrasound causing that larger swing than what we've traditionally experienced. Moving to Slide 14 and our operating expenditure. We were very focused on cost control and delivering responsible cost reductions to mitigate revenue declines in response to COVID-19. Our operating margin of 23.3% is slightly increased due to the financial impacts of COVID-19, and how the numbers have fallen out, but we do continue to deliver industry-leading published margins across Australia and New Zealand. Our employee costs declined as a percentage of revenue. As I said earlier, government subsidies of $6.1 million after-tax have been offset against our labor costs. Included in that $6.1 million, we also had a net top-up payments of around $600,000 that comes off that $6.1 million that we did need to make to our employees or 900 gross. So the net benefit after tax is really the $5.5 million mark, and that benefit really due to test versus Ian's pointed out in maintaining our workforce and not enforcing further standdowns or use of leave or leave without pay across our workforce. So they were in place and ready to go with volumes returned, and that was very important to us. And the way that JobKeeper was meant to be utilized and we keep that responsibly. Our consumable costs remained at 4.5% of revenues despite increased expenditure on protective equipment. Our equipment declined as a percentage of revenue by 0.6%, and that was due to the savings that we derived from interim national supply contracts across our services costs that I've spoken about previously and said that those savings will continue to flow out over the next sort of year or so from here. So we are pleased to be able to deliver what we said we were going to do in that equipment line. Occupancy costs, we received savings of $0.7 from rent rebates received during COVID-19 and our other costs remained reasonably constant as a percentage of revenue as whilst we did have reductions in discretionary spend as a result of COVID-19. These were offset by ongoing investments in technology and the expansion of our operating platforms, those we can support our ongoing growth. Depreciation was $14.8 million, up from prior year by $4.3 million, and that reflects the growth capital investments we've made as well as the Imaging Queensland acquisition. Pleasingly, our refinance debt facilities and decline in interest rates continues to deliver lower finance costs for the company. Turning to Slide 15. Capital management and our balance sheet is strong. We have reduced leverage, coming off net debt of $124.4 million to 1.8x EBITDA, which is pleasing. And again, what we said we would do. AASB 16 adds a right-of-use asset of $88.5 million and the liability for lease payment obligations of $96.1 million. So it nicely grows up our balance sheet. And that's delivered -- we've delivered a net asset increase of $101.1 million, and that's really the result of the Imaging Queensland acquisition and the capital raise of $72 million that we did a year ago now. Turning to Slide 16. Our cash flow and cash conversion of operating EBITDA of $64.1 million. We delivered a free cash flow of $55.7 million, which is a conversion of $86.9 million. Net of replacement CapEx, that's 101.6%. We have given pre and post AASB 16 here, and it's really just to give the message that cash is cash and pre or post AASB 16 free cash flow will remain the same, but the conversion because AASB 16 gross is up, EBITDA will decline as a result of applying AASB 16 EBITDA. Turning to Slide 17 and our capital expenditure. As you are all well aware, we spent around $26 million in CapEx this year, $9.4 million of that was on replacement CapEx and growth CapEx of $16.7 million. And I won't go through all of that detail because Ian's already highlighted them and I'm sure most of you will be well across those projects. Moving through the slides and focusing now on COVID-19 and the impacts on our financial performance. I'm on Slide 19. As I said, the patient activity did decline significantly as a result of government restrictions, we saw this starting to happen towards the end of March, were at the highest in April, where across our business, we saw declines in revenue from 24% to 50%. And this activity did start to improve in May, with June revenues largely in line with pre-COVID-19 projections which was pleasing. And again, pleasing that we had the workforce in place to be able to meet those patient activity as it returned and a happy workforce in place. Pre-COVID, as I said, we had organic revenue growth in Australia at 7.7 -- at 7%, sorry. That came down to 2.4% as a result of COVID and 5.5% in New Zealand, which came down to a negative 1.6%. Our labor cost, we managed our rosters to implement -- to reflect the activity that was occurring in each of our sites. And this did result in a reduction in the use of contractors as well as a number of our people utilizing annual leaves and/or leave without pay, but we were always, again, focused on staff and patient activity, safety and making sure we were meeting the needs of our patients. We did, as we've pointed out, qualified for and received $5.4 million after tax in JobKeeper. As I said, of that comes around a niche $0.6 million of top-up payments that we made to our staff. So the net benefit for JobKeeper was around the $4.9 million, and we received $0.3 million in New Zealand after tax and in addition, payroll tax subsidies of 0.4% were received in Australia. Moving to Slide 20. Consumables. We've spoken about increased use of PPE. We do hold significantly more levels of consumables at the end of 2020 by about $600,000. We received savings in occupancy and equipment costs of $0.7 million and $0.2 million, respectively. And we've spoken about other expenditure where we did put discretionary spend on hold as far as possible. Turning to Slide 21 and our current patient activity as a result of ongoing impact of COVID-19. In July and to date in August 2020, revenue has returned to positive growth across all of our business units except where we've got government imposed restrictions. So Lake Imaging in Victoria, which now represents around 25% of our group revenue, we had revenues there on a par in July with prior year and for the month of August to date -- as of Sunday, they were down 7% on prior year. In New Zealand, revenues were up by 18% from prior year in July. So we've seen a significant rebound and an increased level of activity. Unfortunately, with the onset of government restrictions, that's come down to 4.6% for the month of August. What I would say is pleasing the 7% and the 4.6% is far lower reductions or declines in revenue than what we did see in April in the first round of COVID-19 restrictions. So not great, but certainly better than what we've seen. I won't go through the details of the current restrictions. I'm sure you're all well across what they are. Turning to Slide 22. We want to be clear that the COVID-19 and associated government responses can be expected to continue to have an impact on IDX and we can't accurately project that at this time. Our focus will, as always, be to keep our patients and employees safe, and this will always be put before commercial outcomes. We do have a strong growth agenda at IDX. We've been very clear about that, and we do have a -- we do need a cost base in place to support our growth objectives. We will continue to focus on responsibly managing costs to mitigate revenue declines, but ensuring we remain well placed to continue our growth objectives when activity returns across our operating geographies. We will continue to receive support from government in the form of JobKeeper of approximately $5.5 million. Again, we will need to make top-up payments of around that $0.6 million. So that $4.9 million niche from July to September. And that again will assist us understanding the ongoing impacts to recovery, to retain our skilled workforce and to mitigate the decline in revenues. So we don't have to enforce standdowns or enforce use of leave or leave without pay. To date for the industry and for the underlying fundamentals of our business and our funding models, we don't believe that COVID-19 will have significant or prolonged impacts or that our industry as a whole will be materially altered, which is a positive, particularly when you compare it to some industries that have been impacted. We will, as the year goes on, continue to explore and develop our plans for growth both organically and through acquisition opportunities, and we'll continue to improve growth business cases with consideration of the business case merits and with continued discipline as we always have. Moving quickly through the regulatory updates because it's not a whole lot new to tell. There's been no further announcements on MRI licenses or plans. From November 2019, the MBS brought on the breast MRI and PET items, and that's been a strong contributor to IDX for the [ 19 ] year. In April 2020, pleasingly, the government responded to COVID-19 by relaxing attendance rules for radiologists on some exams as well as allowed electronic referrals and upfront billings, and these were welcome changes that we really believe have merit ongoing in a non-COVID environment. And we would look to continue to work with government to make these permanent changes. In July 2020, as you're all well aware, we commenced indexation across 90% of MBS items, equating to about 80% of benefits, and that rate is at 1.5% and came in from the 1st of July, and we're seeing the benefits of that. Moving to Slide 25. In New Zealand, there's been no material changes to the regulatory environment. Obviously, there's a general election that has now been set for the 17th of October. We've been monitoring that because they've seen no key announcements to date that would affect the DI industry. So with that, I'll hand back to Ian to go through the remaining slides.

Thank you very much, Anne. Turning to Slide 27. IDX now operates in 5 key geographic markets. We operate in Victoria, in Ballarat, in Geelong, in Warrnambool and in the West and Northern suburbs of Melbourne. In Queensland, we have 2 businesses: our South Coast radiology business, which operates predominantly on the Gold Coast and in Toowoomba, but also in Mackay. And we also have the Imaging Queensland business that we acquired in November of last year that includes Sunshine Coast, Rockhampton and Gladstone. In Western Australia, we operate in Southwest, Western Australia in the cities of Mandurah, Bunbury and also in Busselton, and we provide services across regional Western Australia through our contract with the Western Australia Country Health Services. This slide, on Page 27, also includes our newest acquisition, which is only completing on Tuesday of next week, but has been included in this slide given the imminence of the acquisition -- of the completion. And that's Ascot Radiology in Auckland. They are a #1 or #2 provider in each one of these markets that we service across the 5 geographies. We have 73 sites -- clinical sites that we work out of, including 21 hospital sites. We operate 28 MRI machines across the group, 13 of those machines in Australia have full MRI licenses, 4 have partial licenses and we will now have 6 MRIs in New Zealand where we don't need licenses. New Zealand does not have the Medicare requirement for licenses, obviously that Australia does. And the 6 MRIs effectively doubles the MRI fleet that we have in New Zealand from 3 to 6. We employ 131 radiologists and 86 contractors, and we have 1,391 employees at our sites. And we also have some employees, about 3.3% of our workforce working centrally to give us a total employee base of about 1,448 employees in total. Our strategy, as reflected on Slide 28 is consistent as what it has always been. It revolves around our key tenant that good medicine is still good business. The drivers of our strategy are organic growth, business integration and further efficiency gains. We are the most efficient provider in the industry as far as the published results in the industry go. We will accelerate our use of digital and AI technology to improve the patient and their referrer experience, drive our environmental, social and governance agenda, and we'll continue to develop our culture and leadership across our people. And as you would all expect, we are continuing to evaluate further strategic acquisitions that are a good cultural and strategic fit in geographies -- in high-growth geographies. Our final slide on Page 29 outlines our key priority areas for financial year '21. We will continue to drive organic growth through managing the ongoing impact of COVID-19. We're fortunate to be in an industry that will continue to be needed with or without COVID-19, patients will continue to get sick, they'll continue to want to get better. And they'll continue to lead our services in order to do so. We will complete the integration of Imaging Queensland this year and will also integrate Ascot Radiology starting next week. We will ensure that our capital investment continues to generate strong returns, and we'll continue to promote the benefits of MRI and PET technologies. We will also continue to accelerate our digital and AI strategies and continue to develop and execute on the AI front and the broader technology strategy. We will complete the implementation of the patient app across the whole group, and we'll leverage our consolidated reporting platform to develop subspecialty workflows that has really come to the fore over the past several months during COVID-19, where we have had so many of our radiologists able to work from remote locations. In terms of our ESG agenda, we'll focus on IDX' environmental, social and governance priorities to acknowledge the areas that we already do very well in, but also identify those areas where we can do better. We'll continue to develop leadership across our people by supporting company growth with investment in a Chief Operating Officer, a group integration and strategy manager and also a Chief Medical Officer. We will develop leadership capability of our people all across the group, radiologists, clinical and admin staff as well as management. And we will continue to undertake analysis and due diligence on selected acquisitions that are a clinical fit, strategically aligned, and earnings accretive. We're currently considering several growth opportunities in what is a very active healthcare sector. We're happy at this point, [ Bevan ], to open up to the floor for questions.

[Operator Instructions] Our first question comes from the line of Steve Wheen with E&P.

Just you've given some useful commentary around Victoria and New Zealand for the start of the year. I wonder if you could also talk to WA and Queensland and how they started the year. In particular, just interested in what that backlog of deferred surgeries that took place during COVID, how that's manifesting in your volumes in those states? And then also, if you could comment on specifically on IQ, just to how that's progressing on a -- in terms of expectations since you bought it?

Thanks very much, Steve. I'll start with the second part of your question because that's easier. IQ is doing terrifically. They're doing as well as what we expected at the time that we bought them, they're a outstanding quality group of radiologists. They continued throughout COVID-19, both the radiologists and the clinical and admin staff at IQ to live up to our expectations and even exceed them. They're doing an outstanding job continuing to service patients, both on the Sunshine coast and also in the more remote areas of Central Queensland, including the cities of Rockhampton and Gladstone, so we're very pleased with that acquisition. They've integrated nicely within the group during a really challenging period of COVID-19. A lot of their integration has really been done remotely because we haven't been able to visit the group since January of this year when Anne and I were last up there, but we are very pleased with the acquisition and especially pleased with the quality and the goodwill and the people that we've included within the IDX group. With regards to the first part of your question, we called out Victoria, and we called out New Zealand because of the breakout in Victoria recently, and we thought that it would be right to show how Victoria was doing in July and how we're doing in August. And similarly, with New Zealand because of the recent breakout over there. We have not called out our other businesses, but it's fair to say that within our businesses, those businesses that operate behind locked borders where the virus has been well controlled, have been able to very quickly get back to our pre-COVID-19 levels. So we called out New Zealand, for instance, that showed tremendous growth in July of 18% where we obviously saw some of that pent-up demand come back Steve that existed because of COVID. And we were fortunately in a position where we could service that. And we're in a position to service that because we've been able to retain and support the excellent employees we have. We have been able to benefit from that additional demand when it has come back.

Okay. I guess the pent-up demand that you're seeing in New Zealand, I would have expected a similar level of pent-up demand in Queensland and WA, given they have been so successful in managing volumes, but went through a period of deferring surgeries, elective surgery. So can we expect to see -- I mean are you saying it's only back to what you had expected? Or is there sort of some upside there?

Steve, it's a fair observation. And you should probably remember that New Zealand has been locked full so they were in far more severe lockdown. So you would expect to see probably a stronger rebound, and we have made a statement that the growth has been changed to sort of expectation and positive growth. So that's all we're really going to probably be saying at this point of time.

Okay. Fair enough. Could I just take one sort of additional part to the Queensland performance. The earn-out around the IQ acquisition, it potentially was damaged by -- or damaged in terms of the ability to pay it or the need to pay it, sorry, because of COVID, could you just sort of talk to the way you've treated that earn-out going forward now?

Yes. So you'll see the provision that we've got in the earn-out in the financial statement is exactly as we've had and had previously advised, so it's still sitting at the $12 million, and we expect that those earn-outs will be paid. When you see our results, they obviously have been impacted by COVID-19, they haven't been detrimentally impacted and Imaging Queensland would be on the same as that as a stand-alone business. And under -- obviously, we're working with those vendors. They're some of our key doctors in our group. And the processor requires us to move in such as COVID-19 or pandemic to work in good faith, and we expect to do that with the vendors and to work through an appropriate outcome for the earn-out. And as a result of that, we've retained the $12 million in the balance sheet. And that will be worked through over the next sort of 6 months or so.

Okay. Great. Could I also ask about the achievements that you've reported for -- during FY '20, in particular, John Flynn, the PET scan and Pindara, the CT, relocations of MRIs, et cetera. Can you give us a sense of what sort of annualizing effect we might see in FY '21? Or even just what sort of levels of contribution they did in FY '20, so we can put them into some context for the next financial year?

We won't give specifics on that. I think what I could point to you is that you, well, go to our half year results. You'll see in Australia, we were growing at about 6.5%. A lot of those projects have been completed by Christmas time. And so up to pre-COVID, our growth in Australia has increased to around 7%. So that gives you some guidance as to the contribution of those investments that have been made or that we're making pre-COVID.

Those investments, Steve, are also, as you know, those are at the more acute end of the spectrum. So there are PET scans and MRIs. And what we've seen through COVID particularly is that, that end of the market has been a lot less impacted than the lower end of the market, the x-ray and ultrasound end of the market because those patients are largely oncology patients and cancer patients need to be treated even through COVID times.

Our next question comes from the line of Will Macdiarmid with Ord Minnett.

Just in terms of the growth rates you called out there, Victoria and New Zealand. Obviously, Ballarat and Geelong and Pindara are slightly -- were really impacted by those lockdowns in New Zealand, and sort of quite recently as well. Are you able to comment on I guess, the exit rate sort of standing at today, presumably it's a bit lower than where it was at the beginning of August. So is that still gyrating a bit?

The -- so the rates we've given, well to date, up to the 23rd of August. So in Victoria for across the whole of Victorian business, which includes sort of Western Melbourne, Warrnambool, Geelong and Ballarat, were down 7% on prior year. And that's the same. So you -- what you're saying is quite correct in that at the start of August, it would have been better for both New Zealand and Victoria when it’s a decline but we're only going to be giving today's rates.

Okay. That's helpful. So in terms of the hospital contracts, I mean you've obviously had St. John of God Hospital in Geelong and also in Ballarat. Presumably, they're impacted just along the same lines as they were in the original lockdown in terms of elective surgery restrictions, but are they behaving in any different ways and maybe that's a good question as well, potentially even the Queensland Hospital given recent rollbacks there. Are the hospitals starting to pull back in capacity or preparing in different ways. Just trying to think about what the impact might be?

Elective surgery has not been as impacted as it was during the first lockdown and that's in Victoria and New Zealand as well as Queensland. So with the lesser lockdown or lesser turning off of elective surgery, there's been a much lesser impact on diagnostic imaging services as well. So the areas that you called out in Victoria are under Level 3 restrictions, whereas Melbourne is under Level 4.

Okay. No problems. And then also just on the CapEx, you called out various growth activities. Are you still committed to? Are you able to call out specifically what kind of opportunities you might be looking at and potential sort of quantum of growth CapEx coming in?

Pickup were really, really -- it is a good pickup. We have not called out the growth CapEx for this year because it's uncertain. So in previous years, when things were a lot more certain with regard to where we were able to commit to growth investment over the course of the year, we did call out our projections and the amount of growth CapEx we would spend. We have not done that this year. We will continue to invest in growth opportunity but we'll invest in those opportunities as and when it makes sense to do so. So for instance, if we look at the acquisition of Ascot Radiology, we were well down the road of that acquisition -- of the acquisition pre-COVID. We put all acquisitions on hold at the beginning of COVID, but then we executed when we could see our way through COVID to the other side and particularly at that time in New Zealand and we treated our growth CapEx in much the same way as acquisitions.

Our next question comes from the line of Matthew Nicholas with Crédit Suisse.

And congratulations on the result. Just the first one from me. Just on fee per exam, I mean you had some pretty good trends on fee per exam versus volumes in the last year. But in terms of the outlook, through your own words you said the world is uncertain, which is why you haven't given any color on growth CapEx, how we can look at the fee per exam going forward? I think in particular reference to the co-pay element, which is probably one of your biggest differentiators versus the broader industry?

Yes. So the fee per exam will obviously benefit from the 1.5% indexation in Australia and it will also get indexation in New Zealand and across all of our sourcing contracts. So it will benefit from that, but we also expect to continue to move towards those hiring modalities as well. And if we were going to invest in growth CapEx, it will be across those hiring modalities, but it's hard for us to give -- to add to that question not without knowing what our investment is going to be. But we would hope that -- certainly, our aim is to continue to skew that. The 1.7% this year is disclosed, and it was driven by the fact that under COVID-19 restrictions we saw of ops down, x-rays drop off significantly and not nearly as much as the use of PET's and MRIs. So I wouldn't expect it to move by maybe a full 1.7%, but you're obviously going to get probably 1.5% because of your indexation.

Great. And just on the hospital contract component of the business. I know you don't typically like to talk individual contracts, so I won't go there, but there's obviously been a significant amount of press in the last couple of months in terms of the security of hospital contracts and so forth. Can we get a sense on the average tenure of your hospital book and whether you've got some material expiries coming up over the next 12 to 18 months?

As you know, Matt, we don't call out the details on that because it is competitive information, but we have 21 hospitals across the group, the hospitals to come up, these tenders are for 10 years, 15 years -- 10-year periods, 15-year periods, often the 5-year options. So it's reasonable to expect that every year, we get 1 or 2 hospital renewals that would come up. And those renewals do come up periodically. There's nothing really specific to call out around them, and we don't call out any of the individual hospital details.

Great. And just the last one for me before I get back in queue. Just on labor costs. You've articulated JobKeeper, which is very helpful. But can we just get a sense on the labor cost benefit you may have got in the fourth quarter from reduced hours and so forth. I assume the bulk of your workforce now is back at full hours ex Victoria. Can we just get a sense on how much that incremental labor cost step-up is into '21?

Yes. I think -- we obviously can't give guidance or put a number on what those -- what -- how -- the value of the decrease in labor falls, something we've been pretty clear about that. So it's difficult for me to put a number on that for you, Matt, only that we would expect that our employee cost as a percentage of revenue should probably return to where that has been historically.

Our next question comes from the line of John Deakin-Bell with Citi Group.

Two quick questions. One, just to look back on the declines during COVID. Could you just sort of kind of give a sense of how it may play out from here. You've called out the 24% to 50% decline, but the shape of that between hospital versus your community imaging, can you just give us a feel for how that went into that and how it came out in terms of the orders of magnitude or bigger environment versus the other?

Yes. We can give color to that, John, because we said a couple of times that our oncology work was really protected during the COVID downturn. So the hospital work, which is where a lot of the oncology is based was a lot more protected than our community sites. So further color on that can come from the fact that we closed down some sites. And in fact, there are 4 sites closed right now and all the sites in Victoria and all the sites that we did close temporarily because we intend to open those in Victoria and did open, the others systematically after they had been closed, but all of those sites were smaller nonhospital sites. So the comprehensive sites, the hospital sites were fairly well protected during the COVID downturn because that's where all the oncology work was done. And oncology is resistant to these kind of downturns. So the PET work, the MRI work continued, the x-ray and the ultrasound, as Anne said, that's where most of the impact was. And to flow back to one of Matt's questions as well in terms of our billing, providing requesting gaps, we reduced our gap billing and reduced private billing during the downturn on some ultrasound just because we saw the impact on ultrasound, and we had some additional capacity. So we did reduce some of our gaps in that regard. And we will continue to price according to the market that we're in. So in the markets that have come back strongly, we'll be able to introduce private billing again in the markets where we still have that capacity, we're sensible enough to use it up through pricing.

Right. And maybe just one for Anne on the margins. You highlighted that your margins are quite strong. Going forward, I think you've called out on that Slide 29 is supporting the growth of the business with some new people. And obviously, as you get bigger, it becomes a more significant operation. Should we expect that as you grow that the margins kind of remain relatively stable given that there are some investments you need to make in kind of corporatizing the business? Or is it fair to think that margins can continue to expand?

Yes. Next year, John, it's going to be a difficult year for margin driving the EBITDA line because it’s going to be skewed by -- we'll be reporting to AASB 16. So it's going to increase because your EBITDA increases. Also, Ascot -- the inclusion of Ascot into the business, New Zealand businesses, radiology businesses generally deliver higher margin. So that's also going to have a positive impact on the margin, but look, certainly, I guess our view is and we've said that specifically that this year, our operating margin has been slightly increased as a result of how the impact of COVID-19 have fallen out. But certainly, always our focus to continue to manage cost control. We should see some additional ongoing savings from equipment and to -- and with indexation coming in that should also support margins as well. So our focus will always be to improve margins, where we can, but we -- so that would be our focus, and we'll look to try to deliver that.

Our next question comes from the line of Shuo Yang with Microequities.

Just on the core business. In terms of the operating margins, is that similar to Trinity, SRG or slightly lower?

No. They would be lower. There are a few margins anywhere in the world that come close short to those margins that our doctors are able to get at Trinity and SRG, but the margins in New Zealand, as Anne said, are generally higher. So we would expect a higher average margin -- our margin to be impacted positively through the inclusion of Ascot, even though it would not be to the same extent as a business like SRG or Trinity, which are just very specialized in MSK, musculoskeletal services and neuro services, and that's why they're able to generate the high margins that they do. Whereas Ascot provide services across the spectrum. They do a lot of cardiac work, a lot of obstetrics, gynecological work, a lot of body work, oncology work. So they're not just focused on MSK and neuro the way the other practices there are.

Understood. And can you sort of talk through any derivative benefits you get by combining the Ascot and Trinity, SRG, I think if there any referral benefits or labor or cost benefits?

Across the 3 businesses in Auckland?

Yes.

There will be -- we expect there to be some really nice revenue benefits that we do get through providing the neuroradiologists, for instance, at Trinity, with the ability to also report on a high-end CT machine, which they don't have at Trinity. So that will be a nice additional arm that we're able to get to Trinity to provide GPs as well. Similarly, with regard to the MSK services that we do at SRG where we have 2 MRI machines at SRG, we have 1 at Trinity. And now with the 3 MRIs that Ascot has, we've doubled our capacity of doing MRIs. So previously, we used to open a lot more on weekends, Saturdays and Sundays, whereas now we can utilize some of that capacity that Ascot has. And then finally, the other -- the third big area of revenue synergies is in terms of the PET nuclear medicine machine that Ascot has. So SRG did not have a PAT previously. We do nuclear medicine in SRG, but because we don't have a PET, we are limited with the scope and the spectrum of limited services that we can provide. Whereas now that we have access to a PET, and it's very close by, SRG and Ascot are literally across the street, almost from each other. So we're now able to consolidate our nuclear medicine services across those 2 and provide our SRG patients with access to Ascot PET machine. So that's a -- those 3 revenue areas are very exciting for us.

Understood. Just a final question for Anne. Maybe you can just provide our net debt position post the acquisition. And then I guess, also if you can talk about the acquisition pricing environment in terms of vendor expectations in both Australia and New Zealand.

Yes. So the net debt, we will -- we are funding the acquisition with debt, but it is a equity component of 20% of shares in IDX, but with the last 12 months, our adjusted EBITDA for the expected contribution from Ascot, it shouldn't change the leverage significantly at all.

Yes. Okay. And the acquisition pricing environment comparing one for acquisitions in both geographies?

The acquisition environment is actually -- the market is very active in Australia and also in New Zealand, there's an active market. Acquisition multiples. We have not found that they have changed significantly. We are fairly disciplined in terms of the acquisition multiples that we are willing to pay. We're also very disciplined in terms of the acquisitions that we do look at. But the market is very active. We have a strong pipeline, and we're actively working the pipeline. And we're not looking to change those multiples that we are able to -- that we have been able to historically to buy at even though the market has moved. So if you look at the listed entities, we have seen -- we have seen an uptick, I suppose, over the past several months because of the downturn and COVID and then the upturn after that, but we're looking at very similar multiples to what we've always looked at, which is lower multiples, multiples of around 5x for the individual acquisitions and after one of those that we did with GMI at 5x, 2 clinics in Geelong. And then we've generally paid around 8x for the strategic acquisitions, those acquisitions in new geographies like IQ, like SRG and Trinity and recently like Ascot as well. And those are the multiples that we are comfortable at, they're the multiples that we've been at for some time, and we've not seen significant movement on that.

Okay. The opportunities you are working on, they would be more skewed towards the -- versus the size of Ascot. Is that fair to say?

Well, there's a range of opportunities that we're looking at. So it's hard to say the size specifically because the range includes acquisitions that are Ascot size. But we have looked at and are looking at acquisitions that are larger and smaller. The market is very active, you have private equity, you have active players in the market. We've seen some significant private equity acquisitions come about over the past few years, and we expect some private equity acquisitions to offload over the next several years. So the market is active. It is increasingly evident that size helps in a market like diagnostic imaging. So you are able to get economies of scale the way we can, not just in the back office, but in terms of revenue synergies, in terms of buying power, in terms of the policies and procedures and the clinical acumen that can be shared across the group, we've increasingly shown that size and scope helps and in diagnostic imaging, as the world becomes much more specialized, it's becoming more important for -- the size is becoming even more important. So we expect that the individual operators, which used to account for about 50% of the market and probably still accounts for around 40% of the market, but increasingly, we'll see the larger entities because they're able to bring the scope and scale advantages that they can continue to consolidate the market, and we expect to be a part of that glide towards consolidation.

There are no further -- since there are no further questions at this time, I would now like to hand the call back over to Dr. Kadish for any closing remarks.

Thank you very much, and thank you all for calling in. It is an exciting time for us. We've been really proud to be able to share the results of the past financial year with all of you, and we look forward to being able to continue to deliver the same kind of results that you've come to expect from us over the past several years. So thank you very much for your time this morning. Thank you for your interest and your support and look forward to speaking to several of you over the next couple of weeks. Thank you all.

That does conclude our conference call for today. Thank you for your participation. You may now disconnect, and have a wonderful evening.