Integral Diagnostics Limited (IDX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Integral Diagnostics Fiscal Year '24 IDX Half Year Results Call. [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 Chief Executive Officer and Managing Director of Integral Diagnostics. I'm joined here this morning by Craig White, the Chief Financial Officer of Integral Diagnostics. And we're pleased this morning to be able to share IDX's first half financial year '24 financial results with you. At IDX, our vision is to build a healthier world and we do this by delivering the best health outcome for every patient we serve. We always put our patients first, we demonstrate medical leadership. We ensure that everyone counts. We create value and we embrace change. We delivered on our values in the first half of '24 by serving 600,000 patients in the first half. We performed more than 1.3 million exams. We invested $11.7 million in CapEx, including investment in additional upgraded equipment, and we've continued to upgrade our technology to enhance the patient and the referrer experience. We have 254 reporting radiologists in the group, and we continue to grow our IDXt business, the teleradiology arm of IDX, to provide services to more external as well as internal clients. And we continue to develop our subspecialty reporting capabilities so that we could capitalize on the specialist expertise we have within the group. We have 1,968 employees at IDX and we conducted temp checks and pulse surveys on our employees which demonstrate a continuing improvement in our engagement scores. We continue to focus on delivering our ESG strategy in accordance with regulatory requirements. We increased revenue by 7.2% organically in the first half to $231.3 million. We increased our operating EBITDA by 8.7% to $43.2 million. And our operating net profit after tax declined by 5.6% or about $400,000 to $7.4 million due to prolonged cost inflation and the higher interest rates. We declared a first half FY '24 fully franked interim dividend of $0.025 a share. We've invested $3.5 million in growth initiatives and had 5,605 IDX shareholders on the 31st of December. We also are embracing change this year by undertaking a restructure in light of the prolonged cost inflation so that we can position the business well for the future. We've broadened our referral base in New Zealand to include more GPs as we look to combat the non-arm's length referrals in that market. Moving to the first half financial highlights for FY '24. We demonstrated solid organic revenue growth of 7.2% offset by cost inflation and delivered an operating EBITDA of 8.7% and a slightly higher operating EBITDA margin of 18.7% versus the prior corresponding period of 18.5%. Our statutory NPAT declined by $66.8 million, driven by the non-cash impairment of our New Zealand business. We saw a 5.6% decrease in operating NPAT to $7.4 million, an 8.7% increase in operating EBITDA to $43.2 million, a 6.4% decrease in operating diluted earnings per share to $0.031 per share, also our revenue increase organically of 7.2% to $231.3 million. Our free cash flow decreased by 41.3% due to timing of working capital movements, and Craig will go into more detail on that later in this morning's presentation. And our net-debt-to-EBITDA on a pre-AASB 16 basis is at 3.0x, which is a slight improvement over the 3.1x that we were at on the 31st of December 2022. IDX's operating results are consistent with the trading update that we provided on the 3rd of November 2023. The solid organic growth of 7.2% has been driven by improved Medicare indexation of 3.6% from the 1st of July 2023 and an additional 0.5% effective from the 1st of November 2023. Both increases exclude nuclear medicine. We also -- it was also driven by the annualization of the FY '23 out-of-pocket fee increases and a continued favorable mixed impact. We faced prolonged cost pressures in the first half, especially higher labor costs in the regional areas in particular, and driven by inflation and labor market supply constraint, together with higher interest funding costs. Management has focused on containing and reducing these costs wherever possible. It's a priority for us as management, and it is set up further in our key operational initiatives that we'll review later in this morning's presentation. Our operating EBITDA margin of 18.7% is a 20 basis point improvement over 18.5% in the prior corresponding period. We took an impairment loss of $71.5 million in our New Zealand division. It's 35.1% to the $203.5 million carrying value of our New Zealand assets. And it reflects the company's revised, more modest growth expectations for the New Zealand business, consistent with the trading update that we provided on the 3rd of November. This drove a statutory loss of $66.8 million after impairment losses, transaction and integration costs, amortization of customer contracts and other costs, net of tax of $74.2 million. Our net debt-to-EBITDA ratio on a pre-AASB 16 basis of 3.0x at 31 December, 2023 is slightly lower than 3.1x at 31 December, 2022 and is projected to trend downwards gradually over time. The group has declared a fully franked interim dividend of $0.025 per share, the same as the first half of financial year '23, and represents 78.9% of our first half FY '24 operating net profit after tax. As the graph on the next page illustrates, the radiology industry is rebounding nicely off its post-COVID lows. This chart shows the benefits in the top curve that Medicare paid to radiology, and on the bottom curve it shows the services that Medicare paid for these benefits. The 2 key takeaways from this chart are that the industry is bounding well, continues to bound well from the post Omicron lows in late calendar year 2022. And it also shows in the divergence between the 2 curves that the industry continues to move more towards the higher value modalities, the higher value, more acute modalities and fewer of the entry-level modalities. So that's more MRIs, more nuclear medicine studies and comparatively fewer basic x-rays and ultrasounds. We showed 2 graphs on the next page. The top 1 illustrates the operating EBITDA over the past 5 years, and it shows quite clearly the EBITDA since financial '22 in the first half has been improving fairly consistently between '22, '23 and now in financial '24. And on the bottom half, you can see the dividends that we paid consistent with the dividends paid last year. The dividends declared now consistent with the dividends paid last year of $0.025 per share, this year representing about 78.9% of our first half, 24% operating net profit after tax. I'm going to hand over to Craig now to take us through more of the financial detail.

Thanks, Ian, and good morning, everybody. Ian's touched on a number of the financial highlights, but just to really, I think, summarize the story and the numbers on Slide 8, you can see that we delivered solid organic revenue growth of 7.2%, slightly stronger operating EBITDA growth of 8.7% on slightly expanded EBITDA margins of 18.7% against 18.5% in the prior corresponding period. Our operating NPAT was slightly lower than the prior year at $7.4 million versus $7.8 million and that was just simply driven by the higher interest expense in a rising interest rate environment. As Ian mentioned, free cash flow was lower than normal, and I'll touch on that in more detail later, but fundamentally driven by the timing of working capital movements. And again, as Ian called out, leverage was 3x, slightly below the 3.1x at the same time in the prior year. Just to go into some of those P&L line items in a bit more detail on Slide 9, I'll talk to a revenue and effectively the organic revenue growth of 7.2% driven by the Medicare increase of 3.6% affected 1 July, and then the additional 0.5% affected 1 November supplemented with the annualization of the out-of-pocket fee increases that we took in January FY '23, predominantly ultrasound in Queensland, all contributed to drive the solid revenue growth. If we look at it by geography, we achieved 7.8% organic operating revenue growth in Australia. That was slightly lower than the Medicare growth of 9.5%, but important to remember that with our more regionally focused business, the prior year was less impacted by COVID, and hence that affected the growth rate. We had a slightly lower growth rate off a higher base than the industry. Average fees per exam increased by 7.5%, reflected the Medicare indexation, the annualization of the out-of-pocket increase I talked about, and the ongoing positive mix shift that we've seen for many years towards the higher end modalities of CT, MRI, and PET. And then in New Zealand, our organic operating revenue grew 4.1% on a constant currency basis adjusted for working days. Turning to operating expenditure on Slide 10. As Ian mentioned, we've had a real focus on cost control and cost reduction across the group and effectively achieved a 20 basis point as a percentage of revenue reduction in total operating expenditure, despite the fact that our labor costs increased by 20 basis points as a percentage of revenue in a higher inflation environment for labor and given some of the demand supply cost pressures present in the industry. Turning to Slide 11 and the balance sheet. We've touched on leverage, so I won't cover that again. But we do have a significant available headroom under our existing financing facilities of $126.3 million. It's worth noting that we reduced our available facilities by $25 million with a view to reducing our undrawn commitment fees, again, focused around cost reduction. Cash and cash equivalents have decreased by $15.9 million. Again, most of that is due to timing of working capital, I'll be talking about in the next slide. But also there was a contingent consideration payment made in the half in regards to the Peloton acquisition and obviously, the higher interest expense payments. So then turning to Slide 12. And I'd like to speak a little bit here around cash flow. You can see that while we did have a weaker free cash flow half-on-half, it was all driven within the changes in working capital. And when you break that down, it's fundamentally a function of a $10.4 million tax receivable in regards to our FY '23 tax return. We expect to receive that money within the current quarter to the third quarter of FY '24, which will obviously go to reduce our net debt position. And the other 2 key contributors were higher than normal accounts payable balance at 31 December, 2022 following the introduction of a new enterprise-wide general ledger system that led to some delays in payment to suppliers in the prior year. That was worth about $5 million of the movement. And the remaining $5 million is largely a function of the increase in other current assets, which relate to prepayments for equipment service contracts, software agreements and a couple of other prepayments. So in short, we would expect that, that adverse working capital movement to normalize as we receive that tax refund and some of the remaining $10 million may normalize over time, but obviously, that just depends on the timing of payments. Turning to Slide 13 and capital expenditure. You can see that in the first half, we deployed $11.7 million of CapEx, $8.2 million of that was in replacement CapEx, $3.5 billion in growth CapEx. As you'll see from the presentation later on, we have guided the full year CapEx in the $30 million to $40 million range. We are focused on, I guess, being judicious about CapEx, but CapEx is typically skewed more towards the second half. I'll hand back now to Ian to cover the regulatory update. Thanks, Ian.

Thank you very much, Craig. Turning to the regulatory environment. In Australia, MRI licenses on the 1 November, 2022, the federal government deregulated MRI services in regional and rural areas, defined as Modified Monash Model 2-7. As of the date of this presentation, no further licenses or plans for deregulation of MRI licenses have been announced for the MM1 areas. With regard to the Medicare changes, indexation was implemented of 3.6% on the 1st of July 2023 and applied to all radiology services. And then from the 1st of July -- from 1st of November 2023, there was a further indexation of 0.5%, also applied to radiology services. In addition, on the 1st of November 2023, Medicare also trebled the bulk billing incentive for GPs. And for regional GPs, this represents a meaningful uplift, particularly in some of the regional areas that we serve. In New Zealand, there's limited indexation of pricing. However, we did receive CPI-like increases that commenced in December 2023 from the majority of the private health -- of our private health insurers, and we continue to negotiate with other funders. The regulatory authorities in New Zealand have determined that non-arms length referral practices by referrers who own interest in radiology practices or equipment are acceptable. So we're pursuing some strategic initiatives as a result of this, including developing our GP referral base in New Zealand, because the GP segment is less impacted by non-arms length referrals. In both Australia and New Zealand, international medical graduates, radiologists and referring doctors and other clinicians, including sonographers and nucmed technologists are slowly returning to New Zealand and to regional Australia after a 2-year hiatus during COVID, and they're helping to alleviate the skills shortage, particularly in these regional areas. Turning to our strategy update. We will continue to drive organic earnings growth, including through the focus of our key operational improvement initiatives. We will accelerate the use of teleradiology, digital and AI to improve the patients and referrer experience. We will drive our environmental, social and governance strategy and nurture and develop culture and leadership across our people. And as balance sheet capacity permits, we'll consider accretive acquisitions that represent the strong clinical culture and strategic fit. The company believes that the fundamentals of the essential radiology industry are strong. Our industry benefits from being at the confluence of major global trends, demographic and technological. Demographically, the ageing of the population and the increased prevalence of chronic disease and earlier detection capability will drive demand for diagnostic services. And with regard to technological advancement, digitization and the growth of teleradiology and AI is expected to improve the quality and the efficiency of the care that we deliver. The structural shift to the higher acuity modality is also expected to continue, and IDX as a specialist regionally focused, high-quality provider of diagnostic services is strategically well positioned to benefit from these important trends and to grow our services strongly going forward. In FY '21 and beyond, the company's focus on executing the above-mentioned drivers of IDX's strategy to grow its business and in particular, to focus on execution of key operational improvement initiatives, including important cost initiatives, which are expected to lead to an improvement in the second half FY '24 trading performance and the operating EBITDA margin compared to the first half of FY '24 and to be in line with or slightly higher than the second half FY '23 EBITDA margin of 20.2%. For the month of January 2024 and up to and including the 15th of February, the company achieved solid revenue growth of 11.6%, or 7.8% after adjusting for working days compared to the prior corresponding period. Our FY '24 replacement and growth CapEx, as Craig indicated, is expected to be between $30 million and $40 million. Turning to our key operational improvement initiatives, as discussed at our AGM last November. We're focusing on improving our patient and referrer experience, including the rollout of integrated patient booking systems, enhanced e-referral platforms by referrers and educating patients and referrers some important high-volume radiology test for the early diagnosis example, high-resolution chest CT for smokers and cardiac CT's for patients at risk of heart disease. We're continuing to develop our workforce, including sub-specialty reporting, through the use of technologies, such as integrated worklists and artificial intelligence. We're growing our sonographer training program through an internal training school to address our workforce shortage. We're looking to and aligning more closely staffing levels to match our patient demand. And we've increased our regional radiologist registrar positions at IDX sites. Importantly, we're increasing productivity and efficiency. We have simplified and reduced our management layers in our organizational structures so that our decisions are made closer to the front line. We continue to drive non-labor cost efficiencies too, and we continue to grow our teleradiology service, which assists us in cost effectively balancing the workload. We're looking to lift asset utilization by focusing on improving the utilization of our existing machine installed base. We're investing selectively in higher-end modalities within our FY '24 budgeted growth CapEx, and we're targeting more capital light teleradiology tenders, including the first New South Wales public hospital teleradiology tender that we've recently commenced. Turning to teleradiology and AI, in particular, on the next page. The IDX teleradiology service began in August of 2020, initially internally to the IDX Group, but we've systematically rolled it out externally too, to public hospitals and other private radiology practices. We serve State hospitals in WA, Queensland and Victoria, and we recently commenced our first public hospital teleradiology tender in New South Wales. We've grown the service organically with 65 contracted radiologists and reported about 15% of IDX Australian revenue. The service provides specialist care through sub-specialist reporting capabilities, and it allows radiologists in different time zones to report overnight during their daytime hours. It also allows a lot of flexibility for radiologists to report at a time and place that they select. And it includes a variable reimbursement model that's based on the individual radiologist output. We've used AI in IDX for some time, and we've grown the service judiciously -- slowly and judiciously over time. It currently accounts for about 5% of IDX volumes and growing systematically. With regard to ESG, IDX continues to implement and develop our ESG strategy to comply with the proposed climate-related disclosure standards in Australia. I'm going to open up at this point to questions, and we'll hand back to the moderator.

Your first question comes from Sebastian Clemens with Jarden.

I'm just stepping in for Steve here. So just a question on the margin improvement in second half to be in line or slightly higher than 20.2% in last year. Can you just go through some of the key drivers for that margin improvement? Is that going to be based on some of the growth you've seen to-date, just noting a trading update, or is that more a moderation of costs? And then within that, if you could give us a breakdown of how that looks in New Zealand versus Australia, that'd be great.

Yes, sure. So, let me comment on that, and Ian might want to add something at the end. Look, I think a couple of things, I think you can see we've had a solid start to the second half in January and through to mid-February with the 11.6% reported growth or 7.8% on a just for working days. So that certainly, I think on the top line gives us confidence. I think the second thing is the focus on controlling and taking costs out of the business also will contribute to that margin expansion. And I think the third thing is that if you look at the business historically, it is slightly skewed towards the second half seasonally. It does vary slightly year-to-year, but the second half is typically stronger, particularly the months of May and June. May would be typically the biggest month, probably for the industry. So I think there's a combination of those 3 things, which are the drivers supporting that statement. Ian, I'm not sure if you want to add anything.

Yes. So the 0.5% Medicare increase from 1 November helps the second half more than the first half. Also, the increase that we've received from major insurers in New Zealand, the CPI-related increases in December really only impact the second half, so those increases would come through mainly to the second half. And as Craig pointed out, the revenue growth that we've continued to see as this year has begun gives us operational leverage that assists the margin, and should assist us in the second half. It gives us the confidence to indicate that we'll be at or slightly ahead, will be slightly ahead the second half from financial '23.

Yes. And just one follow-up on that, so that 11.6% growth. We obviously haven't seen the Medicare data for Jan or Feb, but do you think you'd be tracking ahead of the market? I just remember that during this half, one of the key drivers of the underperformance was a stronger comp. Do you expect that to continue to be the case in second half?

We have seen that -- we have seen a start in the second half. We're not sure, I mean, as you indicate, the Medicare numbers are not yet out. But we're a little different to the Medicare stats even within the states that we operate. For instance, in Victoria, we're very much outside Melbourne, whereas the Medicare stats would reflect the Melbourne area more. Similarly, with regard to the other capital cities in Queensland and WA, we're more in the regional area. So, based on the geographic profile of our practices and based on the differences that we've seen in recent years, during COVID and the changes after that, and also with the population growth we've seen in some of the capital cities, Sydney and Melbourne in particular, it's been a little different in the regional area. So it's not that, that comparison is not as crisp as it was previously. I don't know, Craig, if you want to add anything to that.

No, I think that summarizes it well, Ian.

Yes. And sorry, just last one, that 11.6%, what's that in Australia then because that's for the group?

Yes, look, we haven't split it out, but I think, it'd be fair to say that both Australia and New Zealand have had a solid start to the year.

The next question comes from Rita Fung with RBC CM.

So, your net debt for EBITDA was at 3x at December, and you've previously mentioned that you'll be targeting a leverage ratio of 2.5x. Are you guys able to provide a timeframe as to when you'll reach this target?

Yes, Rita, look, you can see that we've -- the statement we've made is that we expect to reduce gradually over time, so we haven't put a timeline out there deliberately. But I think following the trading update that we announced on the 3rd of November last year, just in light of that trading update, we indicated that the journey to 2.5x was going to take longer than we thought, but that it is gradually reducing over time. That's probably as much as we can say.

Okay, great. And just one more question from me. Are you guys seeing labor supply pressures across both your regional and metro clinics? And can you also remind us what percentage of your clinics are regionally placed?

I don't think we have an actual percentage of which of our practices are regionally based, but our strongest market share is up in Queensland, where we have very strong market shares in the Gold Coast and the Sunshine Coast. And in regional Victoria, particularly in Western Victoria, and then in regional WA, most areas outside of Perth. And then we're concentrated in South Auckland, which would be more of a metro area. So that's the -- our practices are definitely more regional oriented, and that's why we'd be a little different to how the capital cities perform in some of the states, and we've seen that historically as well. And then with regard to the first part of your question, which just remind me what the first part was?

Yes, so that's to do with supply pressures across your clinics, and whether you're seeing greater supply pressures within the regional clinics versus your metro?

So we're seeing some of the labor supply challenges slowly dissipate. In other words, we're seeing international medical graduates come into the country. We're seeing that influx assist with the radiologist shortage. There still is a radiologist shortage. It is more acute in the regional areas than it is in the city areas. But the international graduates are required to work in regional areas before they move into the cities. So that does assist. And during COVID, there was a 2-year period where no immigration was happening and no doctors were coming into the country. And that hurt us with regard to both the radiologists and the regional areas and referring doctors. But since over the past year or slightly longer, we've seen doctors come back into the regional areas. We've seen some international graduates come back into the regional areas. And that is helping to alleviate the shortage. We're also seeing similar alleviation, slow, but similar in areas like nuclear medicine technologists, for instance. And even in sonographers, because we're training our own, but it takes time. It takes time to train our sonographers and for them to come out of the programs and to make a difference. But we are seeing the beginning of that.

The next question is from Tom Godfrey with Ord Minnett.

Can you hear me okay?

Yes, we can.

Mine just follows up from Seb's earlier, just in terms of the improving growth rates you're seeing in Jan and Feb. Can we just get some color on sort of the referral mix within that, and particularly whether you've seen a pickup in GP-led referrals since the change to the bulk billing incentives in November?

Well, there's no doubt that in regional areas, the change to the bulk billing incentive has helped to attract GPs to those regional areas. So that there's no doubt. And we're seeing a pickup in GP referrals in regional areas. We're seeing clinics that are open longer hours and open on the weekends when previously they were not in places like Mandurah, Ballarat, and other larger regional -- large and small regional cities. Other than that, we've not, I mean, we've not shared our specific referral rates we get from GPs and specialists, but it's fair to say that most referrals in radiology, more than 50% come from GPs. We are a little more oriented towards the specialists, but rely a lot on GPs, particularly in the regional areas. And we've seen some pickups there.

Great. And then just second one from me. Just in terms of the cost out, can you give us any additional detail around which management layers, organizational structures have been rationalized? And then more importantly, just the timing, has that all been executed in the first half? Or is there more to do in the second half?

It's been executed in the first half, but the results are mainly seen in the second half because the changes would have occurred during the last 2 months of the first half and the first month or so of the second half. But then we have the full 6 months benefit in the second half versus a month or 2 in the first half. And they've been changes mainly to the middle management and senior management levels that do not directly impact on patient care. So for example, we've integrated our people and culture position, the chief people and culture offices has been integrated more into operations where people and culture are reporting through operations and working much more closely with operations. And we've reduced the COO level at the company, which we did back in October of last year and elevated our general managers, the senior leadership team without the intervening COO position.

And so just following up on that note, no impacts to operational bandwidth or anything along those lines to-date?

No, no, in fact, we've restructured such that we're able to make decisions closer to the patient and able to get cut through of important decisions, important cost and revenue enhancing decisions, cost reduction and revenue enhancing decisions actioned a lot quicker by having our general managers around the senior leadership table.

Yes, I think, Tom, I'd probably just add that it's not just about headcount reduction. It's actually about the organizational restructure to flatten the structure, so that the key leaders who need to be in the room are all together. And I think that will improve not only efficiency, but also the effectiveness.

The next question is from Dan Hurren with MST Marquee.

Can you hear me?

Yes, we can.

Look, I was hoping we can drill down a little bit more on to the clinical labor costs. And anything you could tell us about, did they improve across the course of the half? You mentioned before that the headwinds are diminishing. I'm just trying to -- I guess, I'm just trying to understand what that looks like into the second half and the following year.

The biggest impact on the clinical labor costs come on the 1st of July when the CPI increases are put into place. So it's those CPI increases that impact us quite materially in the first half, but we don't see those kinds of increases again until for the duration of the second half. And given that CPI is not expected to be as high this year, we wouldn't expect on the 1st of July this year, 2024, to see the same kind of CPI type increases that we had to in that last year. That would be a major driver of the increase in clinical labor costs in the first half.

So what that would mean is -- sorry, Dan, I was just going to say, what that means is that we shouldn't see a significant change in that labor cost first half versus second half, other than the variable component remuneration for radiologists that is linked to revenue. So some of them have incentives linked to revenue, and obviously that moves with the number of scans that they do.

Well, I guess with that brief, just want to point on it. Are you confident that for those, you can get away with paying, with that CPI increase? The increases elsewhere in the industry do appear to be a bit sharper.

I guess we don't expect to pay more than CPI. The CPI was pretty high last year. We expect it to be less this year. We've been able, historically, to manage our costs within that CPI type envelope. And I continue to believe we will do that, especially now with the focus that we have on cost and on productivity, where we're measuring productivity much more actively, much more rigorously than we ever have before. And we're absolutely disciplined around productivity and keeping costs down. So I have absolute confidence that we will be able to certainly keep it within CPI.

The next question is from Andrew Paine with CLSA.

Just want to know if you're seeing any impact or concerns in the second half over inflationary pressures and how that could impact volumes or your ability to charge a co-payment going forward?

Andrew, so I think your question sounds quite similar to probably the question that Dan was asking around cost pressures, yes?

No, not necessarily. In terms of volumes, so your ability to charge co-payments to the patient, are you seeing kind of inflationary pressures impacting their willingness or ability for you to charge co-payments to the patients?

Yes. I mean, I think, first of all, I think in FY '24 we've received more reasonable Medicare indexation with 3.6% from 1 July and then the additional 0.5% from 1 November. So we haven't taken significant out-of-pocket increases in FY '24, unlike FY '23, where we did take some. So there hasn't been any increase. So I don't think, I think in answer to your question, I don't think we're seeing any sort of material impact on demand caused by the concerns by patients about the ability to pay. I don't think we're seeing that.

Okay. So if I'm reading that right, you're not as focused on trying to kind of ramp-up the co-pay given that the indexation seemed okay?

Yes. In fact, last year we increased co-pay quite materially around this time last year. We're not doing that this year.

Okay. So like -- following that forward, the volumes should remain reasonably healthy based on the fact that the bulk billing seems to be a focus for you going forward?

Yes. I mean, I think your best guide probably is the revenue guidance we've provided to mid-February, just to sort of give you a sense of really what's happening out there. Obviously that 7.8% growth adjusted for working days includes effectively 4.1% Medicare indexation and then some positive mix impact, but not seeing a sort of any adverse impact I guess on volumes.

Okay. That's great. And just also on the -- the New Zealand business, obviously, the impairment there on the slower growth outlook which is in line with the previous update. What's your growth rate expectations going forward for the New Zealand business?

Yes. I think the important thing is we are still expecting growth in that market. Basically, if you look at it over time, it's probably slightly less than 5% revenue growth on a CAGR basis, which is sort of consistent with what we're seeing in the market. And then we've just moderated our EBITDA margin expectations to around 30%, which is still very strong, but they're just not as strong as they were. And that's really formed the basis of the impairment that we've taken.

Okay. That's great. And then just -- last 1, if you don't mind, just looking forward to getting back to 25% of EBITDA margins. I'm not sure, if it's been asked already, but -- can you provide a timeline there and, what are the real tailwinds for that one to get back there? I know you've mentioned AI in the past, but, is that the key driver at the end of this?

Andrew, so just, I just want to be clear to you. So you're talking more broadly about the group here rather than just New Zealand?

Yes, no, no, sorry, group EBITDA.

Yes. So look, I mean, we haven't provided sort of long-term guidance, I guess, in terms of where we see that margin, but I think we would expect that we should see some continued expansion in our EBITDA margin over time, which will be a function of -- continuing solid revenue growth driven by the tailwinds in the industry as inflation moderates, costs moderate. We've talked about I think, historically, the operating leverage that is in the business. We've got a high fixed cost base, so we should see continued margin expansion over time, but we haven't sort of put a number on it.

The next question is from David Low with JPMorgan.

Just on the indexation, do you have any sense as to what indexation might be for the next financial year?

I think, David, in short, the answer to that is no. It's normally announced around early May, but don't really have any sense at this point.

And while on the topic, I mean, the indexation that we saw last year and including the second step, I mean, how do you think that compared to actual cost increases?

I think it was clearly below inflation. You know, 3.6%, notwithstanding the additional 0.5% even at 4.1% that is below the sort of inflation that I think we in the industry have seen. It was probably closer to, 5.5%, 6%.

Including CPI adjustment for enough of the workforce, which clearly was more challenging?

Yes.

The only other question I had just on the costs. So we've heard about the restructuring program. The cost savings there, I presume that largely comes through the labor line, the savings you have delivered?

Yes, I mean, I think the short answer to that is yes, David. I mean, labor is clearly our biggest single cost, as you can see in the operating expenditure slide, but we are focused on, all those non-labor categories as well. So, that would be everything from insurance, use of external consultants, travel costs, all these sort of things, all getting scrutiny across the organization. And, if we just go back to that slide in the pack, you can see that other expenses have come down by 0.5% or 50 basis points of percentage revenue versus the prior year. And that's largely, a result of focus on all those cost categories I just talked about.

While we're on it, I noticed the occupancy cost is up a bit. I mean, I know there's been a bit of change in the way things have been treated there in the past in terms of acquisitions, but anything that explains that, let's say?

Yes, I think it's pretty much as we've called it out, it's CPI increases. And we did have a right back of the make good provision in the prior year, to the tune of a couple of $200,000. So that effectively reduced the prior year. That was just a non-cash accounting provision.

The next question is from Elyse Shapiro with Canaccord.

Just, you kind of ran through some kind of telehealth contribution and AI opportunities. I guess within the recent telehealth kind of update, what contribution does that have to more? And how do you expect to impact margin in the longer term?

The telehealth business has been growing faster than the rest of the IDX business, and we expect it's going to continue to do so. It currently accounts for about 15% of revenues, but we expect it to continue to go up. The margin on telehealth is generally stronger than the margin on the existing businesses, mainly because telehealth is, asset life, and radiologists are paid on a percentage of what they actually deliver during a telehealth session. So we expect to derive further benefits both in margin and in revenue as the telehealth business continues to grow. We have recently commenced a contract in New South Wales with a public hospital in New South Wales, which has worked very well for us in Western Australia and in Queensland in particular, and to a lesser extent in Victoria. So we're looking to really build on these telehealth contracts because they're asset life. They give our radiologists the ability to, work quite flexibly, to work from home, to work from overseas in some instances, particularly for the overnight work that can then be done during daylight hours for the radiologist, even when it's, overnight for the hospital. So for all those, because of all those advantages, we're really keen on continuing to grow the teleradiology business, and we expect it'll do so.

And also just with the balance sheet, where it is -- on the call, you mentioned that you were still looking at some accretive M&A opportunities. What is the appetite for M&A at the moment, as well as for kind of Greenfield and Brownfield expansion?

So we continue on our greenfield and brownfield expansion strategy. We've, you know, adjusted our hurdles based on the current economic environment, but we are very actively looking at greenfield and in particular at Brownfield. Brownfields are our favorite method for expansion because we know the market, we know the referrers, we know the demand in the area, and we know that the payback is quite quick, and the payback is also strongest from a brownfield. So we do look to brownfields first. We do have a few greenfields that we have in the pipeline as well. And we will look at acquisitions, when the balance sheet permits.

[Operator Instructions] The next question is from David Stanton with Jefferies.

Just following up on a previous question, if I may, and apologies if this has already been asked, do you still expect EBITDA improvement over the medium term to that sort of pre-AASB 16 level of circa 24% or have you sort of moderated that, please?

Yes, David, I think, so we sort of touched on this before. Look, we haven't put a number out there for the future. I think, but fair to say that the aspiration, the belief that we can expand EBITDA margins from here remains. I think clearly the road to doing that has become harder sort of following the trading update that we provided on the 3rd of November. But, we are a high fixed cost business as the broader industry really, I suppose, normalizes with the tailwinds we've got. We'd expect that we would see solid revenue growth, moderating cost growth, and with that, the operating leverage come back into the business to see continued margin expansion, certainly beyond, FY '24, where we're calling second half margins to be slightly higher than 20.2%. But it's difficult to put an absolute number on it, but certainly all the drivers, I think, are there absent some, extraordinary event.

And David, there is no doubt that over the medium term that technology advancements, including AI, are going to make a big difference in terms of efficiencies. The same ways we saw in the past with the introduction of radiology information systems and with the PAC systems, the picture archive clinical systems, the digitization of radiology, the advent of teleradiology, we saw all of these things allow radiologists to be that much more efficient. Going forward, we'll continue to see technology, especially AI, continue to make that difference and allow radiologists to do more in the same way as technology has allowed radiologists to do more over the past, 10 or 20 years. The real question really is when is the AI going to reach the tipping point that makes the same kind of difference that we've seen in teleradiology over the past 5 or 10 years? And we saw it in terms of, PAC systems over the 5 or 10 years prior to that. But there's no doubt that there will come a time within the next, few years that we will see technology, particularly AI, make a big difference in terms of radiologist productivity. And that's what will bridge the shortage we currently have in terms of radiology supply versus demand.

Understood. Final question from me. Craig, I'm just wondering, if you could give us any kind of guidance in terms of -- a number or a rate we should be using for interest for F '24. I know consensus is around the '22 number for at least interest expenses. Is that a reasonable number in your view?

Yes, David, if you can tell me what the Reserve Bank are going to do in interest rates, I can probably tell you what the interest expense will be. But sorry, I don't mean to be facetious, but I think, look, let me just tell you. I think if you look at the first half interest expense cost, the effective interest rate was around 6.8%. So that was first half FY '24. It's probably important as well, so I'm talking interest expense. When you look at the $8.6 million that you can see disclosed in the P&L, within that is what I would call the true interest. But there are also undrawn commitment fees in there, about $0.5 million. And some amortization of borrowing expenses, which are $200,000. So the effective interest rate for the first half is about 6.8%. Obviously, we had a couple of interest rate increases in the first half. So, maybe the second half, absent any interest rate reductions around, or maybe a touch higher. But, we have guided in our Trading Update on the 3rd of November, to fully finance costs of around $22 million. That includes around $5 million for the double AASB 16 right-of-use assets adjustment. But, and there's no material change to that guidance. So I think that's the best number to use.

There are no further -- excuse me. 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 interest and engagement and participation this morning. It's now 11 a.m. We will be meeting with some of the analysts and with our investors over the course of the next 2 weeks or so. And look forward to meeting many of you in the course of the next few days. So thank you very much for your participation this morning and look forward to catching up soon. Thank you.

Thanks.

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