Integral Diagnostics Limited (IDX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Integral Diagnostics, IDX FY '24 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Dr. Ian Kadish, CEO. Thank you. Please go ahead.

Thank you very much, Jody. And good morning, everybody, who's called in this morning. My name is Ian Kadish. I'm the Managing Director and Chief Executive Officer of Integral Diagnostics. I'm joined here this morning by Craig White. Craig is our Chief Financial Officer. We're privileged to be discussing with you this morning the financial year 2024 results for Integral Diagnostics. We're proud that we delivered on our values in financial year '24. We delivered excellent patient Net Promoter Scores of plus 84 in Australia, and plus 86 in New Zealand. We served more than 1 million patients this year and performed more than 2.5 million exams. We also invested nearly $24 million in CapEx including investment in new and upgraded equipment across the fleet. We employed 243 reporting radiologists this year, and importantly, we grew our Teleradiology business, IDXt, to provide more services to more external as well as internal clients. We have 1,977 employees across our group, and we continue to progress on delivering our ESG strategy in financial '24. Importantly, we look to create value for all stakeholders, including our shareholders by increasing revenue by 6.6% to $469.7 million. We increased our operating EBITDA by 7.4% to $91.5 million. And importantly, we reduced our leverage by 0.3 turns to 2.6x. We also declared a fully franked final dividend of $0.033 per share. And we've just announced -- or we announced during the year, our transformational proposed merger with Capitol Health Limited. We undertook a restructuring late calendar year 2023 due to some cost inflation and cost pressures that we experienced across the group. And we've broadened our referral base in New Zealand to combat the non-arms length referral practices that we're seeing emerge in that market. I'll move now to our financial highlights for financial '24. Solid revenue growth of 6.6% and operating EBITDA growth of 7.4%. We also improved our EBITDA margins to 19.5% from 19.3% in the prior comparable period. Our statutory net profit after tax shows a loss of $60.7 million, driven predominantly by the impairment that we took in New Zealand at the end of last calendar year. We increased our net profit after tax by 1.3% to $18.1 million. We increased operating EBITDA by 7.4% to $91.5 million. And we increased our operating diluted earnings per share to $0.077 on the back of an increase in revenue of 6.6% to $469.7 million. We also improved our free cash flow by 5.5% to $56 million and reduced our net debt to EBITDA on a pre-AASB 16 basis to 2.6x. Our results are consistent with the guidance that we provided on the 20 February 2024. The revenue growth of 6.6% was driven by the 3.6% increase effective 1 July 2023 from Medicare and an additional 0.5% effective 1 November 2023, both of those excluded nuclear medicine. We also annualized the FY '24 out-of-pocket fee increases for gap payments that we took in most of our businesses across the group. And we continue to see a favorable mix impact during the course of the year as patients and referrers move to more of the higher value, more intensive modalities. Prolonged cost pressures during the course of the first 6 months, particularly the high labor costs driven by inflation of labor market supply constraints together with a high interest funding costs. I've precipitated our move to undertake various key operational initiatives where we contained and reduced costs across the group. We announced the impairment loss at the end of the first half of $71.6 million in the New Zealand division, reflecting the changes in the patient referral patterns. And that drove the statutory net loss of $60.7 million for the year after taking into account the impairment losses, transaction, restructuring and integration cost amortization of customer contracts net of tax of $78.8 million. Our free cash flow reflects the increased operating EBITDA and also improvements in our working capital profile and lower replacement capital expenditure in financial '24. Our net debt to EBITDA on a pre-AASB 16 basis of 2.6x compares favorably both to the number on the 30 June 2023 of 2.9x and to the 3.0x number at the 31 December 2023, and it continues to trend down to the group's target ratio of 2.5x or less over time. We also declared a fully franked final dividend of $0.033 per share, with total dividends declared for financial '24, representing 74.4% of our FY '24 operating net profit after tax. I'll move to the next page where importantly we provide a comparison of the second half to the first half, demonstrating the materially stronger second half in financial '24. Particularly, the group EBITDA margin, which improved by 150 basis points to 20.3% for the second half compared to the 18.8% that was delivered in the first half. In addition to that, we reduced the leverage by 0.3 turns to 2.6x at the 30 June 2024. The organic revenue growth in Australia was 2.5% higher in the second half than the first half. And importantly, New Zealand, the second half was 7.9% stronger than it was in the first half. We saw some labor cost growth in the second half of 1.8%, but below the group revenue growth of 3.1% half-on-half. And we also reduced other operating expenditure by about $0.5 million over the course of the 2 halves. Lifting our focus a little on the next page to the industry results. We're looking here at industry disbursements, both on the top line, reflecting disbursements -- revenue disbursements or costs that are paid by Medicare to the diagnostic imaging industry in Australia going back to June of 2015. And the bottom line represents the test that Medicare paid for over the period. And in addition to the strong comeback we've seen since the end of December '22, we've also seen a continued widening between the two lines, which represents the increased proportion of high-value tests, the higher acuity tests that Medicare is paying for in the industry. So the tests like the PET scanners, the MRIs, and the high-speed CTs, which are a lot more expensive and a lot more valuable. And you do fewer of those tests than the proportionate -- those tests have increased proportionately more than the increase we've seen in the basic X-ray and ultrasounds. Looking at our shareholder returns on the next page. We can see that the 7.4% increase demonstrated in operating EBITDA between financial '23 and financial '24 from a total of $85.2 million in '23 to $91.5 million in '24, $48.3 million of which was delivered in the second half. And we also see our dividends this year of $0.033 in the second half and $0.025 in the first half. I'll hand over now to Craig to take us through some of the financials.

Thanks very much, Ian, and good morning, everybody. Just turning to Page 9 of the investor presentation, I'd like just take you through the results for FY '24 in a little bit more detail. So you can see that our revenue of $470 million was up a solid 6.6% over the year. Operating EBITDA of $91.5 million was up slightly higher by 7.4% leading to an expanded EBITDA margin of 19.5% versus 19.3% in the prior year. Operating NPAT of $18.1 million was also slightly up versus prior year of $17.9 million. And that was despite a roughly $4 million increase in interest expense relating to higher interest rates over the year. Operating diluted EPS was also up slightly at $0.077 per share versus $0.076 in the prior year. And pleasingly, free cash flow was also up a solid 5.5% at $56 million. As Ian referenced, we've worked hard to reduce our leverage across the group in FY '24. And you can see that net debt reduced by $11 million with leverage at 30 June 2024 being 2.6x versus 2.9x at 30 June 2023. And whilst not on the page, it was 3x at 31 December 2023. I'd like to just take you through a little more detail of some of the key lines. So turning to next Slide 10, to talk about revenue. If you look at the 6.6% growth, it was effectively driven by Medicare indexation, the annualization of out-of-pocket fee increases that we took across the group. And importantly, the continued favorable mix impact towards higher-end modalities for patient scans. Looking at the split between Australia and New Zealand, organic operating revenue grew 7.2% across the year, adjusted for working days. And when you look at IDX compared to Medicare over a 2-year period, we saw a gain of 0.6% in revenue market share over the 2 years ended 30 June '24 compared to Medicare, which was 6.7% across that period. And the reason why we've looked at it across 2 years is because effectively IDX was growing off a higher base in the prior year than Medicare and therefore, I think appropriate to look at it across a 2-year period in terms of what's happening to market share. In terms of average fees per exam, they increased in Australia by 7.7% against revenue growth of 7.2%, and that was primarily a function of both the Medicare indexation but also particularly the shift towards higher-end modalities. And that was a real feature of the underlying result. In New Zealand, we also saw across the year revenue growth of 5.3%. But as Ian referenced, we saw a much stronger growth in New Zealand in the second half. A lot of that driven by work from the DHBs, District Health Boards in New Zealand. Turning to next Slide 11 and looking at operating expenditure. You can see that when you look at operating expenditure as a percentage of revenue, consumables are slightly higher, just reflecting higher modality mix. Labor costs pleasingly were slightly lower despite inflation and despite radiologist demand versus supply cost pressures, which I think most of you know are present in the industry. And we've worked very hard to really control management of labor across FY '24 and that continues. Equipment costs, you can see, were slightly lower. Occupancy costs increased by 30 basis points, but effectively, that was driven -- but the fact is in the prior period, we had a write back of a make good provision where we were effectively overprovided in FY '23. So the underlying growth was much smaller and would have reflected the impact of CPI increases. You can see also this year we've split out technology costs from other expenses, which, as you can see, are very significant in FY '24 at $15.4 million. We felt it was important to give you visibility of the magnitude of those costs and the importance of technology in our business and the investment that we've made across the business, not only in our clinical and corporate platforms but also around cybersecurity. And then when you look at other expenses, excluding technology costs, you can see that actually decreased by 70 basis points, and that really is consistent with the focus that we've had through the year of being as disciplined as we possibly can around cost control. And again, that continues into FY '25. In terms of capital management, I won't spend too much time on the slide, but we've talked about the fact that it was pleasing to see that leverage came down from 2.9x at 30 June in the prior year to 2.6x at the end of June 2024. You can see also just in the balance sheet, the impact of the impairment that we took in New Zealand, obviously, noncash, but that is reflected in the balance sheet and the carrying value of the intangible assets going forward. Now just turning to Slide 13 and having a look at cash flow and cash conversion. Again, it was pleasing to see that free cash flow increased by 5.5% despite a very favorable movement we had in working capital in FY '23, which largely just reflected the timing around payments to suppliers. And in terms of capital expenditure, on Slide 14, you can see that overall across the year, we invested just under $24 million, split between $14.6 million in replacement CapEx across the group, just maintaining existing fleet; and then $9.3 million of growth CapEx, which effectively, from a clinical point of view, was invested across 4 main projects. The Smith Street expansion up on the Gold Coast, which is scheduled to open in the next month. We've also partially completed the expansion of the Ocean Grove site at Lake Imaging in Victoria, and we've also partially completed the Noosa greenfield up on the Sunshine Coast. And finally, in New Zealand, we have an additional PET operate at our Cavendish site, which opened in February 2024. You can see there that the additional investment that we put into IT of $4.7 million. So on that note, I'll hand back to Ian to talk to the regulatory update.

Thank you very much, Craig. On the 14th of May this year, the federal government announced that from 1 July 2025, any practice location that holds a current license, whether it's a partial or a full license will receive a practice-based license, that provides full Medicare eligibility to all MRIs located at that practice. So in effect, what this means is that practices that currently have a partial license will be upgraded to a full license in the 1st of July next year, and practices that are busy enough to warrant a second MRI at that site would also be able to have a second MRI installed at that site, which would become licensed as its operating out of the same site. It does provide opportunities for practices that do have partial or full licenses to look at investing in those practices that are doing very well, and being able to build Medicare immediately from those -- from any new MRI installed at those sites. On the 1 July 2027, 2.5 years from now, all comprehensive diagnostic imaging practices that have an MRI will be able to get their MRI upgraded to receive full Medicare eligibility. The other key Medicare changes that have occurred this year or during financial '24 and influenced the '24 results with indexation of 3.5% on all PI services, excluding Nuclear medicine that we received on the 1st of July last year, and then the additional 0.5% that we received in November of 2024 -- in November of 2023. In terms of 2024, we're looking at indexation of 3.5% in all diagnostic imaging services, excluding Nuclear medicine from the July that just passed. And on the 1st of November this year, we will receive a one-off fee increase of 3.5%, followed by annual indexation from 1 July onwards for Nuclear medicine as well. We will also get a reduction of 2% for CT services on the 1st of November this year. In New Zealand, there's only limited indexation of pricing, but we have received price increases -- CPI-related price increases from the majority of our private health insurers, and we continue to negotiate with some of the other funders. The regulatory authorities in New Zealand have determined that non-arms length referral practices by referrers who have interest in radiology practices is acceptable. And as a result of that, we have diversified our referral base in New Zealand. So we've included more general practitioners and are working with our GP referrers to more comprehensively work up their patients prior to the specialist referral. And you would have seen in the second half of this past year of 2024, how New Zealand has improved revenue compared to the first half by 7.9% as the new strategy takes hold. In both Australia and New Zealand, we've seen international medical graduates, both radiologists, but also importantly, referring doctors and other clinicians like sonographers, nucmed technologists and other clinical specialists, slowly returning to New Zealand and also to regional Australia and helping to alleviate the skill shortage we have in those areas. Turning now to our strategy update. At IDX, we believe that good medicine is good business. We look at both growing our existing business and margin as well as our strategic mergers and acquisition opportunities. In terms of the existing business and margin, we will continue to drive organic earnings growth through focusing on execution of the key operational initiatives that we announced at the end of last year. We will also continue to accelerate the use of teleradiology, digital and AI to improve the experience for patients and referrers. We will continue to drive our ESG strategy and to lead through our values. And as our balance sheet capacity commits, we will consider accretive mergers and acquisitions that represent a strong clinical, cultural and strategic fit. We believe that the fundamentals of the essential radiology industry are strong. Our industry benefits from being at that interface between major global trends on the demographic side as well as the technological side. Demographically, the aging of the population and the increased prevalence of chronic disease and earlier detection opportunities will continue to drive demand for diagnostic services. And as technology advances, digitization of the growth of teleradiology and AI is expected to improve the quality and the efficiency of the care that we deliver. We expect to continue seeing the structural shift occurring to higher acuity modalities as you've seen around the world. IDX is a specialist-focused quality provider diagnostic services, and we're strategically well positioned to benefit from these trends and to grow our services nicely going forward. In '25 and beyond, the company is focused on executing on these drivers of our strategy and growing our business. We expect to implement the transformational proposed merger with Capitol Health in the fourth quarter of calendar year '24, subject to satisfaction of the conditions precedent to the merger. The combination of our 2 complementary diagnostic imaging business is expected to realize significant benefits for our combined patients, our doctors and our shareholders. IDX achieved mid-teens revenue growth in July, which includes 2 extra working days versus the prior corresponding period, in line with Medicare for the states in which IDX operates. In financial '25, replacement and broad CapEx for IDX, excluding Capitol, is expected to be between $40 million and $45 million. I'm going to briefly review the last few pages in the deck, which provide a little more detail on our strategy. Our focus remains on the execution of the key operational initiatives that we announced at the end of last year, improving the patient and referral experience through things like the online appointments platform, strengthening referral relationships through our priority service lines to refurbish and our enhanced e-referral platforms. And also educating patients and referrers on selected diagnostic tests like high-resolution chest CT for all smokers and cardiac CTs for patients at risk of cardiac disease. With regard to workforce development, we're continuing to enhance our clinical productivity through the use of technology like our integrated worklist and artificial intelligence. We've grown our sonography training program to address the workforce shortages in that area, and we're continuing to work very hard and more closely aligning staffing levels to match demand at each clinic. We've also increased our regional radiologist training positions at the IDX sites. We will continue to improve productivity and efficiency to drive our nonlabor cost efficiencies and to grow teleradiology so that we can cost effectively balance our workload. And we'll continue working on increasing our asset utilization by focusing on improving utilization of the existing installed machine base and targeting more capital-light teleradiology tenders like the New South Wales tender that we secured earlier in this calendar year. We've highlighted on the next page, our teleradiology and artificial intelligence arms as they are material in terms -- not just in terms of saving lives but also in terms of improving efficiency across the group. Our teleradiology business was launched in August of 2020 and since then, it has grown more than any other business unit within IDX. It provides flexibility for radiologists to report at a time and a place that they select. And it also is based on a variable reimbursement model so that we pay at a consistent percentage of billings to the reporting radiologists. And we serve some large state contracts in Western Australia, Queensland and Victoria and secure our first one in New South Wales earlier this year. We've also been early adopters of artificial intelligence, starting at the Apex Radiology clinic in Western Australia in February 2019, and now utilized across -- almost all businesses in the IDX fleet. The AI shortens the time for cases that are detected by AI to be abnormal and allows these cases to be reported next by the reporting radiologists, much improving patient care, but also improving efficiencies because radiologists tend to spend less time on studies that have been declared by the AI system, to be disease-free. AI accounts for more than 5% of our IDX volumes and is growing. And we've been working very closely with AIDOC, which is an international radiology AI provider. And we've been working with them now for several years in terms of growing the algorithms that we use across our fleet. Moving to our ESG initiatives. We are continuing to develop and implement our ESG strategy aligned to our values, to ensure that we comply with the proposed climate-related disclosure standards in Australia. And we will be providing more detail on our ESG initiatives when we publish our FY '24 ESG report later this year. I'll touch on the next two pages on the transformational merger with Capitol Health. Our vision is to be the leading ANZ provider in diagnostic imaging, and we'll do that by achieving the optimal health care outcome for our patients and referrers through delivering best-in-class clinical service technology and capabilities and providing the leading platform that will attract and retain the best of the best in terms of the radiologists and key professionals. The acquisition terms are compelling. They've been unanimously accepted by the Capitol Board -- recommended by the Capitol Board. And it's a hardy synergistic combination with significant and ongoing value creation potential. The strategic rationale and financial benefits are laid out on the following page, the final page of the presentation. Importantly, our scale will now be significantly enhanced with a nationwide footprint of 155 clinics supported by more than 350 radiologists and about 3,000 employees. It gives us a platform to drive the best-in-class clinical outcomes for our patients, our doctors and our referrers. Gives us an opportunity to offer increased training, fellowship and research opportunities to radiologists that we can retain and train the leading radiologists within our group, so we can continue to provide the high-end services that the market is looking to -- is growing faster. And it's a financially attractive opportunity. Our confirmatory due diligence reaffirmed more than $10 million of anticipated annual pretax debt cost synergies, and the majority of those are expected to be realized within the first year after implementation. We expect to deliver double-digit pro forma FY '25 EPS accretion to Integral shareholders, including the cost synergies. And we also expect additional upside to administrative and revenue synergies that will occur over time. It positions us well for further growth. It gives us an increased ability to invest in the more costly higher-end modalities like MRI and PET/CT. It gives a good opportunity to grow teleradiology volumes not only by offering Integral's leading platform, IDXt, to Capitol radiologists, but also load balancing using teleradiology across the entire group. And it puts us in a stronger financial position to pursue further value accretive investments, including potential M&A. We'll hand over now to questions. And if I can hand back to you, Jody, to take us through the first question, please.

[Operator Instructions] Your first question is from Saul Hadassin from Barrenjoey.

Just two for me, if I could. Maybe starting the first question. Ian, just looking at the incremental margins that you generated on revenues in FY '24, if I look at the margin, the EBITDA margin, I think I get about 22% roughly for the additional revenues that you generated in the year. So I'm just wondering -- the question is really, what do you think maybe held back some of that margin expansion in the year, considering that you're talking to both the benefits of price and mix and high modality services? Is the issue here that the cost to deliver those high modality services is actually higher than what we might think? Is the issue of scalability, just some comments on that incremental EBITDA that you generated in FY '24 would be great.

Thanks, Saul. The inflationary impact on consumables, for instance, in modalities and in the expensive modalities like the PET/CTs did impact our margin on some of those modalities. So we did see high inflation in the beginning of FY '24, and some of those radionucleotides and also some of the contrast media we used in some of those nonlabor expenditures in addition to the labor CPI that we experienced at the beginning of the year. Going forward, though, we would expect inflation to come down, both wage inflation, which we've seen lower this year and was at the beginning of last year. And also inflationary costs will continue to come down over the period. There are some areas where we have seen fairly significant past increases, contrast media, for instance. But most of that should over time came roughly in the same way as inflation would. I'll ask Craig, if you want to add anything to the margin answer, Craig.

Sure. So, I think just in addition to what Ian has mentioned, I mean, I think, obviously, we've worked hard on the labor side to contain that and reduce as a percentage of revenue. But there's no doubt that those pressures still exist, both in terms of inflation and shortage of supply. So we probably would have liked to seen an even bigger reduction had it not been for those factors. But the other key thing I'd probably just talk about is the -- and you can really see it on Slide 5 is the increase in spend in technology. We've been investing heavily, particularly in the clinical side of the business and around cybersecurity. And you can see that half-on-half, we had about a 16% increase in technology costs, and that probably suppressed the second half margin a little more than might otherwise been the case.

And then if I could Craig's one other. I think at the half year, the guide had been for CapEx to be in the vicinity of $30 million to $40 million for FY '24. It came in around $24 million. Just wondering for the guidance to '25, were there projects that were effectively canceled in terms of any greenfield site developments or is effectively the spend just being pushed in or fallen into FY '25?

Yes. I think definitely there's a case of -- I think, overall, we've looked to manage CapEx as tight as we can. I think there's definitely some projects where timing of spend has shifted. So for example, the Smith Street site up on the Gold Coast, which is a big comprehensive site due to open in September, just around construction and all that sort of thing has led to a few months delay. So I think that significant spend, which was originally thought would occur in FY '24 didn't, and will slip into FY '25. And so there's probably a few other examples like that. And the range that we're guiding to $40 million to $45 million, I think, is essentially obviously based around the budget. I think historically, if you look at it, we've typically probably spent at the lower end of that range. And that's usually a function of even though things are planned, often delays around construction, getting those certification that you need and so on. So my sense is that I'd be probably guiding to the lower end of that $40 million to $45 million range.

Your next question is from Steve Wheen from Jarden.

I just had a question around -- Craig, you mentioned the administrative synergies that might emerge that haven't been taken up or accounted for in your overall $10 million figure. Could you just give an idea of what administrative synergies that represents? And then the second part of this is, now that your gearing has come down a bit in the year, the aggregation of the 2 businesses, what sort of benefit could you expect to see with further lowering of that gearing? I'm just trying to understand the sensitivity to your grid as you move -- or become less geared over the next sort of 12 months?

Yes. So I think probably 2 questions there, Steve. So firstly, look, when we talk about administrative synergies, I think we're probably talking about process improvement, particularly around billing. I think there are some practices that we have internally within IDX that I think can be applied across the Capitol business that are likely to lead to an improvement in the efficiency of that process. So that's what I'm referring -- we're referring to there. I think in terms of gearing, look, a couple of comments. Clearly, as you say, when you look at our gearing now at 2.6x and Capitol's gearing and assuming the merger goes ahead later on this year. Yes, consistent with what we said earlier about the merger, the merged group gearing is lower. I would say that we are in the process of effectively looking to refinance the facility for the enlarged group. And the intent at this stage is that we will put that new facility in place concurrent with the implementation of the merger or very close shortly thereafter. And I think -- it's therefore very difficult for me at this point to give you sort of a precise answer, but I think the expectation is of on the large business, we will achieve better pricing overall as -- on a relative basis. And then obviously, at lower gearing, you would expect to have a lower margin applied to the base rates as gearing comes down. So I think those are 2 key things. I think the other thing I'd probably just call out is in refinancing. We currently have some New Zealand dollar debt. You'll see in the annual report that our average effective interest rate across the year was 7.03%. That splits about 6.6% average in Australia and 8.1% in New Zealand. So you can see that financing New Zealand [ 1.5% ] higher. And I think the intent is that we would probably look to finance the group in A dollars going forward, which will yield a further benefit of the interest line.

Excellent. That's clear. Second question I had is, I'm just trying to understand particularly on the Australian side, your revenue growth, it was below Medicare, as you pointed out, for the FY '24 year. And it also was weaker than a lot of your peers that have reported this reporting season. I'm just trying to understand what -- how would you explain your relative underperformance of the revenue line relative to some of your peers?

Thanks, Steve. I think a big part of that is the cost pressures that families have been facing across the country and looking for bulk billing alternatives rather than having to pay gap payments. So I think looking broadly at the areas where we would have underperformed, the market would have been areas where we did put fairly material gaps in place to counter the inflationary impacts we were seeing. And in those areas, it's above billing competitors that really did benefit as patients shopped around a lot more. So I think that, that's probably the single biggest driver for that shift. If we look at it on a state basis, most of that shift occurred in areas like Victoria, where at Lake Imaging, we do charge gaps, and we did see some work go over to competitors to do far more bulk billing. And it happened on a similar basis in areas of Queensland, where we do have bulk billing competitors versus some other areas where everyone in the market is charging gaps. We didn't see that kind of market share movement.

Got it. Sorry, can I just probe that a little bit further. And just on the regional exposure that you have, are you still [Technical Difficulty] shortages of radiologists that might be capacity constraining on volumes as well? Is that another sort of a potential explanation for that perhaps weaker relative to peers revenue growth?

I don't think that, that's the case, Steve. Radiologists where we are short are covered nicely by IDXt. I mean, IDXt is a terrific strategic lever we have to lower balance across practices quite nicely. So where there is a shortage of radiologists and there is nationwide, in fact, worldwide, there's a shortage of radiologists, but the shortage is covered by IDXt. And when we went it our waiting list, it's not really the radiologists reporting that's driving the increased waiting list. So it's -- I mean it would be more related to a decreased patient demand because of the gaps that patients are being asked to fill. We still have capacity at IDXt. You would have seen in this presentation where we called our 80 radiologists now work at IDXt compared to, I think it was 65 the last time we put those numbers out to the market. So the teleradiology business, the IDXt business is growing nicely and covers the radiologist shortfall quite nicely. But there is that gap -- and what your question does highlight as well is that the biggest impediment to growth for the industry really is the access to those kind of skilled professionals. In regional areas, it was more acute than it is now because as international medical graduates come in, they are required to work in regional areas in Australia for up to 10 years before they can move to the metro areas. So we do see that shortage that's different in the regional areas, the relative shortage in the regional areas, the metro area. It's not as acute as what it was a year ago.

Great. And one final one, if I could. Sorry, this is the last. Technology costs, just wondering, given your comments just now, whether or not that going into FY '25, whether you're expecting those costs to continue to go up year-on-year?

Steve, I'll take that. I think don't sort of give specific guidance around these costs, but I think I would expect that they're going to continue to be an important feature of the investment that we make in the business. But I do think that there's probably been an increase in spend to establish a new level. And certainly, we would be looking to sensibly control those costs and get the right balance going forward. So I think over the last probably 2 years, there's been a significant investment, particularly around cybersecurity for obvious reasons. And one of the hopes that, that will sort of stabilize and grow at more normal levels going forward.

Your next question is from David Stanton from Jefferies.

Look, in terms of EBITDA margin longer term, you were at circa 21% pre-COVID and pre-AASB 16. To get back to pre-COVID margins post-AASB 16 implies an EBIT margin of about 24%. Are you still sort of looking to that as a longer-term target? And if so, approximately what year are you looking at?

Yes, David, thanks for your question. Again, I don't think we're providing any guidance here. But certainly, I think the aspiration to continue to expand margin is there, consistent with what we've said on previous calls. And I think as we grow in size and scale, then clearly, I think the merger with Capitol as it proceeds, should help underpin that margin expansion. As the group grows, we deliver the synergies and all those sort of things. So I think that will be a real enabler. And probably consistent with some of the things we've talked about, [ filing ] scale will be in a determining factor of margin expansion going forward.

Your next question is from Craig Wong-Pan from RBC.

Just on the IDXt revenues, could you share how much comes from internal services versus external work?

Yes, I can provide a perspective on that. I mean, I think the majority is internal. We're effectively -- we are utilizing that platform to load balance across the group. And I think it's an important tool, if you like, for us to be able to load balance in an environment where there are obviously constraints on supply of radiologists. So the majority would be internal, but we are increasingly winning external contracts as well. And Ian, I think talked to the most recent of those, which was the New South Wales North Coast.

Yes. And that one's coming to my sort of second question. Just those upcoming tenders. Could you share kind of the possible size of those or just putting in kind of context the potential if you were to win some of those, what that could mean for the business?

It's very difficult to generalize to be honest. I mean, they go from small to potentially quite large. There are a number of opportunities we're looking at right now as that platform grows, and I think it's well respected in the marketplace. I think relative to some of the alternatives that people might be able to use. So we're certainly looking to grow going forward.

IDXt today is one of the top 3 teleradiology providers in the country, and probably the fastest growing of those given the external contracts we've won. And we are actively competing for contract as they come up from both -- from the incumbents as well as new contracts as people realize the advantages that having scale in teleradiology in particular office. Because with teleradiology, you can justify having radiologists to run the clock. It does give you an ability to help our practices that do have after-hours work, but don't have that at the kind of scale that warrants having their own radiologists on standby.

And you want to push a little bit...

Yes, I guess the other part of the answer as well is that even some of the internal teleradiology work we do is for large external clients that we've been servicing for a long time, for instance, in Western Australia and in Central Queensland.

And if you could just push a little bit on what you consider like a large contract like a largely teleradiology contracts. Is that sort of in the 10s, like $20 million, $30 million? Or is how -- what you view a large contract to be?

No, I think, Craig, I wouldn't be thinking $10 million to $20 million, although I wouldn't say it's impossible. But I think anything in that sort of $3 million to $5 million is a nice add-on for the business at the marginal level.

And my last question, just on the changes to MRI licenses, could you share what your thoughts are, how that affects your business.

Yes. They're quite exciting, I think, particularly for incumbent providers over the next couple of years because practices that we have, like the CT scan practice in Central Brisbane -- in the Brisbane CBD, for instance, that currently has a partial license. We'll see that upgraded to a full license in the 1st of July next year. And we have the potential there to even add another MRI depending on the increase in demand that we see, that will then be able to service that area of Central Brisbane specialist because there are a lot of specialists in that CBD area. And if we were to put a second MRI at that site, that MRI would be immediately licensed. So that's a business case we'd be looking at right now. There are other similar business cases in other places across the group but that's sort of the obvious one that stands out.

But on a net basis, the ability for you to get full licenses and get greater reimbursement, is that kind of on a net basis, a benefit? Or do you think there'll be more competition as well that could take share potentially from your clinics?

Based on the analysis we've done so far, over the next 2 years, we should see a net benefit, a nice net benefit from this particularly from the 6 partial licenses we have that now get upgraded to full licenses. Like the one investment CBD for instance and 5 other partials that get upgraded to full. But the -- we will see a lot more competition would be starting the 1 July 2027 when we would be able to see other practices who don't currently have licenses that may have MRIs and may wish to purchase MRIs, be able to compete with the license providers. So we would see a lot more benefit, I would think over the course of the next 2, 2.5 years without as much competition as what we would see coming about in '27. Importantly though, and this is critically important. In Australia, our patient population is less serviced by MRIs than most other countries in the OECD. So if we look at MRI utilization rates in most of the OECD, including New Zealand, Western Europe, Canada, the U.K., we see MRI utilization materially higher than Australia in terms of MRI scans per population in the region of 50% higher MRI utilization in those countries. So if you look at the U.S., there almost twice what we are in terms of MRI utilization per thousand. So part of that difference has been because of the MRI licensing regime that Australia has had for the past several years. And as that changes, we would expect our utilization of MRIs to become much more similar to the rest of the developed world. And at that point, even though there will be additional MRIs in the market, the demand for MRIs will be higher, too.

Your next question is from Lyanne Harrison from Bank of America.

I might come back to labor costs again. So in the second half, when we're talking about labor as a percentage of revenue, obviously, the work you've done around managing that has paid off in terms of percentage of revenue, it's down to 62.1%. Can we expect further labor cost out and efficiency in '25 and see that percentage of revenue reduced further? Or do we think that where you exited '24, given increase in labor inflation and the like is likely to stay at that sort of level?

Lyanne, I'll try to answer that question. I mean I think for IDX on a stand-alone basis, we did have to reduce some headcount, which I think we did last October, November. So there are no other programs for a similar sort of restructuring at this stage. What I would say, though, is we will certainly, even on a stand-alone basis, be looking for some operating leverage in terms of as revenues grow, trying to contain those nonclinical costs across the business. So we would certainly be aiming to bring that percentage down further on a stand-alone basis. But obviously, as we proceed with the merger and assuming that goes ahead, we've talked about the fact that of the $10 million of synergies that we've called out, the majority of those are around eliminating duplicated roles. So when you look at it on a combined basis, you would expect that some of that synergy benefit is going to flow through on the revenue line -- sorry, on the labor line.

Okay. And one other question on gap. So understanding what you're saying about a little bit of volume elasticity there with some patients moving to bulk billing practices. But you had gap increases probably about 2 years ago, nothing really in '24, given the MBS fee increases. What's your thoughts on further increases to gap payments in '25?

We'll continue to monitor the market -- market by market and for us essentially the -- each region independently. It's sitting independently. So we do price differently, Lyanne, and Geelong to Ballarat, for instance. And hence we price based on the supply demand dynamics in that particular market. It's hard to say at this point what the gap changes are going to be. Obviously, in those markets where we've noticed some fall up in volume because of gaps, we'd be a little more cautious in terms of increasing gaps. And in some markets, we may even look at removing the gap entirely because we feel that the volume benefits from doing that would be worthwhile. So we do run detailed analysis in each market and we do monitor this on an ongoing basis. But you're right, the kind of wholesale gap increases that we instituted at the beginning of the -- when we first saw the impacts of inflation, roughly 18 months ago, we implemented probably the largest of those. We don't expect that kind of large increase to come by, again, given that indexation has been reasonable.

Your next question is from Tom Godfrey from Ord Minnett.

I'll try and get it brief. Can I just ask around the cost out you guys took at the back half -- first half '24. Is that annualizing into '25? And if so, can you sort of help us with the benefit there incrementally?

Yes, Tom, so I think the answer to that question is, yes, you will see a benefit, probably worth about 5 months worth because most of that restructure took place in October, November last year. Look, we haven't called out a specific number. So I don't really want to put a number on it now, but you certainly will see some benefit in this first half.

Okay. And a lot of talk around investment technology costs. Like when do you expect to see the benefits of the operational efficiencies coming through from the tech investments?

Yes. I think it's important to realize that I think some of those investments are necessary. I've talked about cybersecurity. It's not a discretionary spend. I think anybody who's not investing in that space is probably exposed. But in terms of some of the other investments that we've made, both on the clinical and the corporate side, some of that investment has gone into enabling our teleradiology business. So you certainly see benefits going forward from that. And on the corporate side, increasingly, we've got enterprise-wide systems now that, again, as the merger with Capitol proceeds, we would see that being a key enabler of getting some of that operating leverage in terms of technology costs.

Got it. That's clear. And just last one for me. Just on the outlook slide. You called out mid-teens growth at July. Just sort of wondering if the movements in working days, whether it's pretty consistent in August?

Yes, I think if you were to adjust for the working days, August would not be dissimilar.

Your next question comes from Andrew Paine from CLSA.

I'll be quick. Craig, just wondering if there's any guidance you can give us on interest, G&A and tax expense into FY '25.

Andrew, I think I'd point you obviously to the supplementary slides we've included at the back of the investor presentation. So I'm talking about Slide 29. I think we haven't provided specific guidance. I'm not going to give you specific numbers, but I'd encourage you probably just have a look at those FY '24 numbers, and I'm sure you can sort of probably apply some estimates, particularly based on some of the earlier comments I made around debt refinance. And of course, the other thing is assuming the merger proceeds, then that's obviously going to impact all these numbers as well.

Okay. So if we look at like 2 half exit rates and then and your comments on top, that will be, right?

I think so. You'll certainly see when the scheme booklet comes out, you'll see pro forma historical financials prepared and that will probably provide you a guide as well.

Okay. That's great. And just one on -- I know you've touched on this, but just looking at the second half growth in Australia, revenues were up about 5.9%, but that benefited from pretty good indexation plus the additional 0.5% that came through in November. So backing all that out and kind of making some adjustments there, you might be looking at that 2.5% give or take mix volume as the growth driver there. It seems kind of pretty weak, and I know you've touched on it, but is that all in relation to people cost living pressures and moving away to bulk billing facilities? And again, is that something you expect in '25?

Yes. I think that what we've seen also is an increased tendency for referrers to refer patients directly for the higher-value modalities and not build up the same way as they did in the past. So historically, the way it generally works is referrers would refer patients for an x-ray or an ultrasound. And if that came back or it's not definitive, they would then refer the patient on for a CT or an MRI. What we're seeing increasingly now is the referral coming in directly for the CT or directly for the MRI and by pricing those lower value-added studies initially. So that's also impacting volume somewhat by increasing the revenue we get from the higher-value modalities, but reducing the number of tests and the number of patients that present to the clinics because they'd be presenting once, not twice.

Yes. And I think the other thing I'd probably just mentioned, just take you back to Slide 10 and the average fees per exam, which in Australia over the year, we're up 7.7%, which is pretty, pretty solid. Obviously, the Medicare indexation contributes to that. There was some annualization of price increases. But there's probably a good sort of 3%, 3.5% modality mix benefit in that number. So probably a little stronger than the numbers you mentioned, Andrew.

Okay. So 3.5% modality, so then you've got volume plus you've got price like where's the issue like is that -- then that implies volumes went backwards?

Yes. I think I mean -- I think fair to say, yes, I mean you can see that the average fee per exam increased by 7.2% against overall revenue growth -- sorry, average fees per exam grew by 7.7% against organic revenue growth of 7.2%. So volumes did decline overall by 0.5%, and that was a function of the movement in mix towards MRI and CT/PET and so on.

Your next question comes from Gretel Janu from E&P.

Just 1 question for me. Just in terms of New Zealand, we just see the revenue line picking up in the second half. Just wondering now what the expectations for the contribution of New Zealand going forward and particularly to margins here.

Thanks, Gretel. I mean, New Zealand contributes about probably 12%, 13% of revenue, a little higher in terms of margin, given the EBITDA margins a little in excess of 30%. So I think we would be sort of looking for continued solid growth both in Australia and New Zealand going forward. So I wouldn't see that overall mix shift between geographies being sort of a major issue.

Your next question comes from Andrew Goodsall from MST.

I think I'm down to one as well. But just looking forward to the deregulation in 2027, I guess there's 2 things in our minds. Just is there a sort of risk -- there's a bit of an arms race to close out any areas of under service -- or only underserviced areas? And secondly, with that level of competition, what does that do in your mind to the opportunity to seek a copayment?

Thanks, Andrew. The increased competition that we will see from '27 onwards will make it a little more challenging in some areas to put copayments in place. But by the time we get to 2027, though, we would have seen MRI utilization in Australia to catch up a lot more to be more similar to the rest of the world. So I would see demand for MRIs continuing to increase. And I would see practices in areas where we can provide that premium service where we have access to the subspecialty radiologist reporting in those areas and patients that are referred by specialists where if they've been paying gap payments to those [ tests ] continue to pay gaps in radiology as well. But we'll obviously monitor market by market to determine where we can put the gaps in place. And in '27, there will be more competition and competition from other areas that we're not going to see for the next 2.5 years. So it's -- '27 is quite a way out. I would expect the way that MRI utilization around the world is increasing that even if there is an arms race to bring in more machines. I would see that the demand for MRI continue to match that increased supply coming in. It's just such a useful modality. And it's being used more and more and is changing the treatment patterns for some very high-volume conditions for the pathology for instance. And I would see Medicare and other payers being pressurized really to open up a lot more indications for MRI because these indications, they're just evidence-based for MRI utilization to continue to go up. So a good example of that is MRIs of the need for patients over 50 who are the patients who need new MRIs. Medicare used to pay for that a few years ago. They're not paid for that for patients over 50. It's been taken off the Medicare benefit schedule over the past few years. But I'm sure that when they are reflecting on the data now, they would have seen the procedures undertaken by orthopedic surgeons going up a lot more because GPs don't have access to MRI the need for patients over 50 the way that they did back in 2018 and earlier. So I would see MRI indications continuing to grow. Cardiac MRI is becoming more and more important. Breast MRI, prostate has been a high-growth area for us for some time, and should continue to see growth. So yes, there will be a lot more supply in '27, a little more supply in '25. But it doesn't -- it's not a concern at this point, certainly, not in '25 when the competition would still be limited. It's a very sensible expansion part that Medicare has embarked on by allowing the existing practices with licenses to expand for additional licenses before allowing an arms race like the one you allude to begin. And I think that by the time that, that does start, the market will be seeing a lot more demand for MRI.

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

Thank you very much, and thank you all for your attendance. The session really was engaging, and we appreciate the questions that were asked. We are particularly excited at this point, both in terms of what we're seeing in the industry overall, what we're seeing in our business and the potential for increasing the scale of our business through this transformational merger that we proposed with Capitol Health that we expect to be completed towards the end of the calendar year. So it is a particularly exciting time. We do appreciate the support that we have and do get from our shareholders, and thank you for your interest this morning.

Thank you. That does conclude our conference for today. Thank you all for attending. You may now disconnect your lines.