Integral Diagnostics Limited (IDX) Earnings Call Transcript & Summary

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

Thank you very much, Drew. Good morning, everyone. My name is Ian Kadish. I'm the Chief Executive and Managing Director of Integral Diagnostics. I'm joined this morning by Craig White, our Chief Financial Officer. We're pleased to be talking to you this morning about the results for IDX for FY '25 H1 and also regarding our outlook for the company. Turning to our page on values. Integral is a values-driven company. We always put our patients first. We have excellent average patient Net Promoter Scores of plus 83 in Australia and plus 79 in New Zealand. We served more than 600,000 patients in the half and performed more than 1.3 million exams at IDX prior to Capitol. We also invested $26.9 million, excluding Capitol, in capital expenditure, including $14.8 million in growth initiatives. And this compares to $3.5 million in the prior comparable period, so a significant increase. We have 362 reporting radiologists, including Capitol. This includes 200 employees and 162 contractors. We also have 2,807 total employees across the 2 companies. We have demonstrated continued improvement in our engagement scores in our temperature check and pulse surveys that we send out to employees. And we continue to focus on our ESG strategy in accordance with regulatory requirements. We completed our merger with Capitol Health on the 20th of December last year. And we're on track to deliver projected merger synergies of at least $10 million, and the majority of which will happen in the first year -- are happening in the first year post-merger. We currently have 8,777 shareholders as of 31 December. We're executing a very structured program to combine both IDX and Capitol teams to create the One Team, almost a textbook program focused on uniting us being better together. Our Board and our management team have visited 28 IDX and Capitol clinics in the past 6 weeks on the back of the One Team, a merger integration program. We've also held Board management and radiologist dinners that have included more than 90 radiologists across all the regions where we're integrating with Capitol, so both Capitol and Integral radiologists. Turning to the financial highlights. We've demonstrated solid revenue growth of 7.8% and operating EBITDA growth of 8.2% and a strong operating net profit after tax growth of 31.9%. This is on a stand-alone basis. We've also increased our free cash flow by 22.7% and importantly, increased our operating diluted earnings per share on a combined basis by 14.2% to $0.036 per share. Our net debt-to-EBITDA on the 31st of December was 2.8 and is 2.6 when you include the projected synergies. This compares to 3.0 in the prior comparable period. Our operating EBITDA margin reflects our nonclinical labor costs being contained at approximately half the revenue growth and overall IDX corporate costs reducing in absolute terms by about $1.3 million compared to the first half of last year. However, this margin was adversely impacted by continued clinical staff shortages and labor cost inflation, especially in 2 regional areas, driving our labor costs to be higher than expected in those regional areas. The group has declared a fully franked interim dividend of $0.025 per share, which is the same amount as was declared in the prior period. Moving to the industry growth rates that we've seen from Medicare. So the chart on the next page shows the industry growth in terms of benefits paid by Medicare on the top line and the services provided -- the diagnostic imaging services provided on the bottom line on the chart. And the 2 charts continue to diverge, as they have in recent years, because of the increased number of higher value-added tests that are done relative to the basic X-rays and ultrasound. This is a trend that we see across the world. It's a trend that we do expect to continue. And it's a trend that IDX is placed very well to take advantage of. The trend did impact us a little in terms of the CT reduction that occurred on the 1st of November 2024 and that CT's -- Medicare reimbursement for CT was reduced by 2% on 1 November. And we are over-indexed with CT because of our overweight higher acuity modalities, which means we're around 40% CT revenue as a percentage of total versus about 1/3 for Medicare overall, which means that we were a little more impacted by that reduction in November than what the industry was. But it also positions us well for things like the CT lung screening program, which will happen later in this calendar year on 1 July. Turning to the page on shareholder returns. You'll note that our EBITDA there of $46.2 million includes a stub period of about 10 days when Capitol are included in our numbers, which reduced the number slightly because of that period being the Christmas, New Year period. But you'll see that earnings have consistently increased each half since financial year '22. And we've maintained our dividend constant since financial year '23. I'm now going to hand over to Craig to take us through some of the more detailed numbers.

Thanks, Ian, and good morning, everybody, and thanks for joining the call. I'll take you to Slide 8 in investor presentation. Ian has already called out a couple of these numbers. But I want to just focus first on stand-alone IDX operations. And then I'll comment briefly on the consolidated result, inclusive of Capitol for the short period following the merger. So revenue overall across the group grew 7.8% on a stand-alone basis, which was solid. The operating EBITDA grew slightly stronger at 8.2%. And as Ian has already talked about, the margin whilst expanded slightly was constrained by the -- some of the clinical costs in 2 regional areas, in particular, where we saw strong growth and effectively had to service that with a higher cost to serve patients. If you look down to the operating NPAT line, operating NPAT growth was strong on a stand-alone basis at 32%, as was free cash flow at roughly 23%, with good free cash flow conversion prior to replacement CapEx of around 89%, which was up on the prior year of around 75%. Just turning to the balance sheet. The leverage, as Ian referenced, was reported at 2.8x. But if you adjust for the $10 million of synergies from the merger that we are confident will be achieved within the first 12 months of the merger, that leverage ratio comes down to 2.6x, which is in line with expectations and below where it sat at 31 December, 2023. Just looking briefly at the consolidated results. It does include the Capitol results for the stub period from the 20th of December to the 31st December post-merger implementation. And you'll see there that effectively Capitol contributed $3.5 million in revenue for that period with an overall operating NPAT loss of $1 million. And that was just a function obviously of the slow period through the festive season in a business that's obviously got a lot of fixed cost. I'll just draw your attention to the fact that we have provided some pro forma numbers for the full 6 months for both IDX and Capitol on Slides 26 and 27 of the presentation. Just looking at revenue on the Slide 9 in a little more detail. The overall 7.8% growth. If you break that down, we saw 8.4% growth in Australia as a headline or 6.7% adjusted for working days, which was below Medicare for the various reasons that Ian has already discussed. I won't go through those again. Average fees per exam rose nicely by 5% reflecting both Medicare indexation and also just the continued move in mix to higher value modalities like CT and MRI. And in New Zealand, we saw operating revenue growth of 6.6%, slightly higher when adjusted for working days at 7.4%. Just turning to operating expenditure on Slide 10. We did see operating expenditure overall reduce by 10 basis points, obviously, a number of contributors to that. If you look at consumables, we were 20 basis points lower. That reflects both, some procurement savings on an IDX stand-alone basis and also just modality mix through the 6 months with slightly lower contribution from PET during the 6-month period. As we've already talked about, labor costs were 80 basis points higher, fundamentally on the clinical staff side, in particular these 2 regional areas that Ian has referenced. And that was despite the fact that we actually have been very disciplined on the nonclinical side of the business with labor costs only growing at roughly half the revenue growth rate, a little over 4%, in line with expectations. And we have, overall, at an IDX corporate level, reduced absolute costs by $1.3 million across the 6-month period relative to the PCP. Equipment costs largely in line with the PCP. Occupancy costs came down slightly, just a function of lower CPI increases with the higher revenue increases. And we had a couple of short-term leases that were ceased. Our IT costs increased by about 20 basis points and that's just a function of the ongoing spend and investment in cybersecurity and other IT systems. And other costs overall decreased by 60 basis points, again, coming back to that point as raised earlier around focus on containing costs across the business. Turning to Slide 11 on the balance sheet. I've already called out the fact that leverage was at 2.8x or 2.6 adjusted on a pro forma basis. Net debt ended at about $299 million, up from $210 million in the prior half. And that was just a function of the assumption of the debt from Capitol following the merger. As many of you would know, at the time of the implementation of the merger, we also refinanced the group's debt facilities and put in place a new enlarged facility that provides us with significant liquidity headroom. And we currently, at 31 December '24 have about $139 million available under the group facilities, subject, of course, to compliance with covenants. I think that's the main points I want to raise on the Capitol side of things. Turning to Slide 12, cash flow. I called out earlier that free cash flow growth of 23% and conversion of roughly 89% was strong, driven by an improvement in working capital half-on-half. Turning to capital expenditure on Slide 13. You can see that overall across the half, CapEx was around $26.9 million. Obviously, ongoing investments into replacement capital required to meet capital sensitivity requirements. But notably, growth CapEx was up significantly versus PCP at $14.8 million versus $3.5 million in the prior half period. And that largely reflects investment into new sites at both Ocean Grove in Victoria, Smith Street on the Gold Coast and Noosa on the Sunshine Coast. And we have yet to really see the benefits from a revenue growth point of view flowing from those new sites, which we would expect in the second half and going forward from there. I'll pass back now to Ian just to cover off a number of important updates in the regulatory environmental space.

Thank you very much, Craig. There's a very positive regulatory climate for radiology going forward and specifically for companies with scale positioned the way that we are. From 1 July this year, any practice that holds a current license, whether full or partial, will receive a practice-based license that provides full Medicare eligibility for all MRIs at that practice. What that means is for companies like ours with 16 partially licensed magnets across the country that every one of those partially licensed magnets would be upgraded automatically to a full magnet on 1 July. And in addition, all MRIs that are on a site that has a full or a partially licensed machine gets access to a full Medicare rebate. So specifically, if we look at sites like Imaging Olympic Park, one of the world's leading sports diagnostic imaging centers. We currently have one full license and one partial license at Imaging Olympic Park. We're in the process of constructing now to be ready within the next month or 2, another MRI at that site. So that by 1 July this year, we'll have 3 MRIs, 3 fully licensed MRIs operating at that site, a site that already has the 2 MRIs at the site operating at capacity and one of those has a partial license, only one is a full license, which means that we'll have 3 full licenses at Imaging Olympic Park. Similarly, at the site we have in the Brisbane CBD at the Queen Street Mall, we have a partial license at that site that becomes automatically fully licensed on 1 July. So we'll have access to the specialists in that region as well as GPs because the difference between a full license and a partial license is that the full license gives us access to the specialist market, whereas the partial license only allows access to GPs with a very limited specialist access. The additional change that will happen from 1 July 2027 is that all MRIs at that point become fully licensed. But the change that has been promulgated by Medicare over the next few years is a sensible change. And that it allows the market to gradually move to a fully deregulated state. And it allows those that do have licenses, full and partial licenses in particular, to continue to benefit from those licenses over a 2-year period. And it prevents the kind of arms race that would otherwise occur for MRIs in the absence of that. On 1 November of last year, Medicare reduced benefits for all CT services by 2%. And as I mentioned previously, because we are over-indexed to CT, it did disproportionately hurt us. But it does position us well for the National Lung Cancer Screening Program, which is outlined as the next point on Page 15. This is a program that will utilize low-dose chest CTs to screen for lung cancer in asymptomatic high-risk populations, including all smokers and ex-smokers. It's a program that has been hugely successful overseas, saving lives for patients and also being materially beneficial to overseas radiology operators, particularly in places like the U.S. and Canada where the program has been very active. This program begins on 1 July this year. The government has committed $264 million over 4 years to the program. And we would expect to be able to obtain -- to service more than our market share of that $264 million over the 4 years. Medicare also announced just this last weekend that the Federal government will be investing $7.9 billion to increase the bulk billing incentive for all Australians and to move the bulk billing rate up to a target rate of about 90%. This is very beneficial for general practitioners. But it's also beneficial for companies like ours because as more patients see GPs, more referrals will also occur to radiology providers like ourselves. We'll also see more referrals to specialists, which in turn also will generate additional radiology referrals. Moving to the next Page 16 and the New Zealand regulatory environment has not seen much in the way of changes or indexation. We have seen, importantly, more radiologists and other clinicians moving into both countries. And as overseas international medical graduates come into Australia, they are required to work in regional areas, which will help us -- for 10 years, which will help us alleviate the regional shortage. And importantly, the Australian Health Practitioner Regulatory Agency, or AHPRA, has planned to implement an expedited accreditation process for radiologists, a similar process that they already have in place for other medical specialties, including anaesthesia and psychiatry, which will allow internationally trained radiologists from designated countries like the U.K. and Ireland to come into Australia. And this will help alleviate the skill shortage, particularly, as I say, in the regional areas because these radiologists will be practicing in regional areas for 10 years after coming into the country. Moving to our strategy, Page 18. We will continue to drive organic growth, including through continued focus on some key operational improvement initiatives. We'll also be accelerating our use of teleradiology and digital and AI to improve the patient and the referrer experience and doctor efficiency. We'll continue to drive our ESG strategy and to lead through our values. And right now, we're working on the post-merger integration with Capitol, which will include the realization of at least $10 million of projected synergies, the majority of which will be in the first year of post-merger integration. Strategic mergers and acquisitions remain a key component of our strategy going forward, even though our focus now is on the integration piece. The company believes that the fundamentals of radiology remain strong. Our industry benefits from being at the confluence of major trends. But demographically, the aging of the population and the increased prevalence of chronic disease and early detection is going to continue to drive demand for radiology services. And technology advancements like digitization and the growth of teleradiology and AI will improve the quality and the efficiency of the care that we deliver. And we expect to see the structural shifts to higher value modalities like CT, MRI and PET/CTs continue. In FY '25 and beyond, we're focused on executing these drivers of IDX's strategy to grow our business. We also remain focused on the key operational improvement initiatives, which are expected to improve our operating EBITDA margin over time. And then following the integration of Integral and Capitol, following the merger of 20 December '24, the merger is progressing well. And as indicated a few times, we are on track to deliver at least $10 million of annual pre-tax net cost synergies in the majority in the first year. Going forward, IDX is also positioned to benefit from further deregulation of MRIs and from the introduction of the National Lung Cancer Screening Program. Both of these are material developments for the industry where IDX is ideally placed to benefit from them. In financial year '25, replacement and growth CapEx is expected to be about $60 million to $65 million, including $20 million relating to capital. We'll now open up to questions.

[Operator Instructions] Your first question comes from David Stanton and Jefferies.

If we could start sort of near term, I wonder if you could give us some ideas about how you can control those clinical staff costs going forward? What can you do to sort of control those costs?

Thanks, David. The most immediate and near-term lever we have at our disposal right now is IDXt. It's a very important lever, so particularly for the regional areas because teleradiology allows us to report in any regional area. And IDXt, our teleradiology business, is the -- one of the few businesses in the radiology industry in general that has an ability to easily attract radiologists. So we continue to grow at IDXt. We have about 90 radiologists to date. We have a pipeline of new radiologists coming in to join IDXt all the time. And moving more work to IDXt allows the work to be done more efficiently and at a lower margin. We're also looking forward to the expedited pathway that government or AHPRA will be producing for radiologists. So it is the next cap of the rank after the expedited clinical specialist pathways that have already been implemented for anaesthesia and for general practice. And radiology would be next to come with the next cap of the rank. And we expect to see to be able to recruit radiologists from places like the U.K. and Ireland on this expedited pathway quite effectively. Also the bulk billing program, David, that government recently introduced, the traveling of that bulk billing incentive for GPs is very -- is much more material in the regional areas than it is in the cities. So we would expect to see more GPs being able to bulk bill more patients in regional areas and drive up the number of patients in the regional areas coming in. And then finally, I suppose, CT lung screening, it's -- the CTs are our highest margin modality. They're the modality which uses least radiologists and labor resources. So as we move more towards CT through things like lung cancer screening, and it's material, the $264 million over 4 years, we will see margin improve just because of that modality change.

If I could just follow up on that last statement you made. You've noticed -- you've told us that you had about a 2% cut in CT public reimbursement. I mean is it possible given the rural setting that -- and potentially lack of less competition in the metro setting that you could increase price in CT scan and still see volume? Is that a possibility going forward?

We're very selective about increasing price in CT in particular. Because CT is our highest margin modality, we don't like to put price on CT. And in most places, almost all places, we don't charge any gaps for CT just because it's a high-margin modality. And usually, we would charge bigger gaps on the lower margin modalities. So CTs are also quite elastic in that you can expand the number of CTs you do quite easily. It's not nearly as time intensive as MRI, for instance. So while we were hurt more by the reduction that Medicare put in place on 1 November because of our over-indexing on CT, we do think we're nicely positioned for the growth in CT that we will expect. And based on overseas experience, the lung cancer screening program has driven significant volume in the CT modality in particular. Because what happens oftentimes is patients who present for lung cancer screening, these patients are high-risk patients. A fair number of them, roughly 15% will need additional diagnostic work done. And a lot of them need an additional CT to be done 6 months later. If, for instance, a nodule is found, nodules are very prevalent in this population, you would need to monitor that in 6 months' time. The patient would need to come back and would drive more CT volumes.

And finally for me and I'll get back in the queue. Does the Capitol acquisition allow you to grow more in line with Medicare growth rates given that it's more in faster growth metro areas?

We would expect that because Capitol is over-indexed in the metro areas as compared to our overweight -- the original IDX business being more overweight in the regional areas. So we certainly would expect that with Capitol and Capitol's exposure to the metro area that we would get that growth in the metro area as well. Also importantly, to point out, Capitol bulk billed a lot of their patients. And the new bulk billing initiative that was announced over the weekend will help the Capitol practices in particular. As the GPs increase their volumes, we'll see more referrals to the Capitol clinics and those positioned in the metro areas will do very well.

Your next question comes from Saul Hadassin with Barrenjoey.

A couple of questions for me, if I could. Can I just ask on Capitol's performance for the half? If you could give us any comments as to the underlying performance of that business maybe versus its previous comparative period? I think we can basically back solve for the EBITDA that CAJ delivered in 1H '25 using that net debt-to-EBITDA number you gave us? But I'm just keen to get your sense sort of operationally what you think happened to that business in the first half? It looked like it may have gone backwards a bit at the EBITDA line?

Yes. Saul, so, I can probably just respond to that. I think just go back to my previous comments. We have included some pro forma numbers for both IDX and Capitol on Slides 26, 27, effectively as if the acquisition had occurred on 1 July. So I think if you were to -- and you'll be able to have a look at obviously Capitol's first half FY '24 numbers compared to these numbers. But the revenue growth was a little softer. Still there was revenue growth half-on-half of a little over 5%, but there was an improvement in EBITDA. And the reason why revenue -- one of the contributors to slower revenue growth was the fact that there were 4 clinics that were loss-making that were closed. There was also an insurance recovery in the period prior to that, which when you normalize all that out, whilst it didn't show a strong growth on the revenue line, there was good growth on the EBITDA line. And Capitol's margin overall, you'll see from the pro forma number, sits at around 21.5%, which is obviously above the 18.8% that IDX reported stand-alone. So probably just linking Ian's previous comments around the shift towards more of a metro balanced business. I think if we do see stronger revenue growth at a higher margin, then those 2 combined should contribute towards -- favorably, I suppose, on a go-forward basis.

Could I also ask just on transaction costs. Can you give us an estimate of what that's likely to be in second half '25 at a pre-tax level?

Yes. So, I think the -- we've called out the transaction costs, which have effectively being booked in the first half. You can see that on Slide 25. And it's referenced in various other places through the pack. So there's roughly $15.5 million on a pre-tax basis that has been booked -- sorry, $15.5 million for IDX, a little more if you include Capitol. There would also be transaction costs that were incurred in Capitol that are adjusted for in Capitol's opening balance sheet as part of the acquisition. So what you're really seeing here is just the transaction costs on the IDEX stand-alone side. Look, we haven't specifically called out in terms of providing any guidance for the second half. But I think what I would say to you is that we would expect that the transaction and integration costs that we called out in the Scheme Booklet, which were around $50 million are still more or less in line with where we expect to end up.

And then last question for me, maybe more of a high-level question. So we've clearly heard the government's announcement as it relates to expanding bulk billing incentives for GPs and increased funding. I mean it seems to be the case that without that 3.5% indexation that came through in 1 July last year, the margin performance for the stand-alone IDX business would have been a lot worse and unable to cover that wage cost inflation. As we look forward, maybe a question for you, Ian, how comfortable are you that Imaging will continue to see a level of indexation that again assists you at least growing your revenues in line with costs? I think the big disappointment this half was the lack of margin expansion in the underlying IDX business. So I guess to what extent do you have confidence that you can start to deliver some operating leverage maybe into FY '26?

I do have confidence that operating leverage will come back into the business driven by our scale -- our increased scale. Just the increased scale on its own delivers operating leverage because we get buying power. We get efficiencies across the group that come about through scale, which is very helpful even on the recruitment side. In addition to that, as you said, Saul, there's -- we do expect indexation to come in this year. Indexation this year is likely -- it's hard to guesstimate as to where it would be. I mean last year's indexation for us you called out 3.5%, but actually came in a little less than 2% when you include the 2% reduction that came in November. So because we're in the same position as the rest of the medical fraternity GPs and other specialists with the exception of pathology, we expect indexation would not be too different to what it was last year. Inflation has come down. So indexation would be a little lower. But we'd expect it to probably come in with a 2 in front of it. But it's just very hard to estimate. The other benefit that we will see next year is the Greenfields that we have in place. So including the important Greenfields, the big ones like the PET/CT we have in Noosa, which is an area that really will generate a lot of PET/CT. It's a patient demographic that works very well, particularly for things like PET-TSMAs, which are the high volume, higher margin PET/CT part of the work that we do. But the one part I think, Saul, that I think a lot of analysts are underestimating right now, in my view, is the positive impact through things like the lung cancer screening program and the MRI deregulation, particularly for partially licensed magnets, like the 16 that we have in place. And also the merger synergies, the $10 million at least of merger synergies, that have already started coming in and will continue to come in. And most of that will be realized within 1 year of 20 December '24. So we would expect that also to drive further margin improvement going forward.

Your next question comes from Steve Wheen with Jarden.

I just wanted to drill down a bit on the wages cost. And I don't -- I struggle to understand why it continues to grow for the same reasons each period? IDXt is something that you've had for a while now. And how come you haven't been able to leverage it already to kind of moderate that wage increase if it is only located in 2 regional areas?

You're right, Steve. We would have liked to have been able to use IDXt more. And it's been a question of scaling IDXt up. It's a business that started from a standing start in August of 2020 during COVID and has grown materially since then. But we've had to put the systems in place to ensure that we've got the systems that can scale up well to the point that we now have them all in place and can scale up a lot more quickly, as you can see from the number of radiologists we have in our pipeline right now, more than 30 radiologists coming in, more than 80 radiologists, 90 radiologists in IDXt right now reporting for us. It's a business that -- we finally have got the systems in place that we can scale it up a lot more quickly. But the other thing in the regional areas also that we did call out last time when we presented our revenue results at our AGM was that we do have in those regional areas capped price contracts. And in those capped price contracts, we are -- in periods where Medicare grows at double-digits like Medicare has grown recently, we are capped out in terms of our growth at that high single -- in high single-digits. So we don't quite get the full Medicare growth that we would see in those regional areas, even though we're doing the work. We only get recognition for that work in the following year. So there is a delay because the cap price then gets reset a year later. So October, we had a big reset of our cap prices. But growth in regional areas has happened a lot through those hospital emergency departments and that's where we have our contract. So in regional areas, much more than in metro areas, when patients are not well, they present to their local hospital ED, especially when GPs are charging gaps. And we've seen significant growth in those hospital EDs that we service. And our growth there is capped out during the current year, even though we do get benefit the next year.

Steve, sorry, I might just add to that as well. I think if you think of the combination of -- in these regionally based reporting contracts that we've got, where we've called out one in particular that was capped until 1 October last year, what we've seen is strong growth in that, as Ian referenced, probably much stronger than we've seen even in prior periods, driven by probably this -- just affordability, people going to EDs or public hospitals and so on and the ability to just turn on the tap with IDXt with teleradiology. I mean the fact is we are doing more and more through teleradiology, but just there are some absolute constraints. You can't turn on the tap that quickly. So -- and that's led to the need for locums at this higher cost. So we'll obviously be looking to address that going forward and with a view to ensuring this is cyclical, not structural.

Okay. That makes sense. I wonder if you could just quantify the impact on your margin from those capped contracts that you have, because clearly, that must be one of the bigger impacts to your margin and to sort of -- and it's been capitalized into your outlook. So I wonder if you can just put some numbers around it so we can adjust for that as we look forward? And then the second part to this question is, if volumes are growing so strongly, as you suggest already, does it present another risk that you get to that cap -- at the revised cap again? Or have you got a lot more of a buffer such that you don't have this same scenario emerge 1 year later?

I might just provide a couple of comments here. Look, I mean, we can't put a number on it and sort of haven't put a number on it. But just to provide some context, I'm sure Ian's got a view as well. But I think, first of all, we've probably seen particularly strong growth in the prior year as well as continuing into this half. So it's true that either we have a cap in one contract, which resets in October. The other one is effectively a cap which resets the following years. So we've seen strong growth in the last probably year or 2, but at some point that growth has to taper. I think it's a reasonable assumption to assume that you're not going to continue to see that very high growth continued. And therefore, the bumping up against the caps where we've then got the obligation to serve at a higher cost. So I would expect that to normalize over time. And that's on sort of the revenue side of things. On the cost side of things, come back to what we were probably talking about before, that over time solutions include higher use of IDXt and teleradiology to reduce that cost to serve. So I would say the issue is more one on the cost side that we've seen in the 6 months than it is the absolute impact on revenue in the 6 months.

Just to add to what Craig said and just to put some information on there, Steve, is that there are 2 major cap contracts. One, as Craig said, resets in 1 October, the other resets in 1 July. One is in Western Australia, the regional areas in Western Australia, Country Health Services and the other is in Central Queensland.

So that's 1 July which year?

Every year 1 July. So we get recognition in the following year for the increase above the cap that happened in the prior year. And it's only in years -- like the most recent years where the growth in Medicare has been at double-digits that we get capped out. We usually don't get capped out because growth is usually even in the high single-digits. But it's only when it gets to these double-digit kinds of growth rates that we get capped out the way we have. And we have to wait for the following year to then be recognized, because we get the uplift, which recognizes the expenditure that we went through in the prior year, but there is a delay. And the way that the accounting works is that we obviously can't count the additional benefit we get the next year for that -- for the services we provided, even though we went above the cap which gets us better reimbursement for next year.

Okay. Sorry to labor it, but why won't you disclose the impact of that on the margin? It's clearly distorting the impression that we get to see of what your margins are, that you're suggesting are no longer going to be there. It would be very helpful given you don't provide any guidance to actually be able to adjust for that?

There is a competitive component to it as well. I mean I wouldn't want to give information that competitors could then use to bid for those contracts in future years. So -- we need to keep that in mind also. But what we could do is we could discuss internally to see what kind of additional visibility we can give that would not have a competitive impact on us.

Your next question comes from David Low and JPMorgan.

Can I just continue on with this one? So when you say that there's an issue with competition, I understand that you've got 2 contracts. So presumably mixing them together obscures that a little more. Are the revenues a public item that we could get an understanding of? Because frankly, unless the revenues are public as well, pretty hard for others to really adjust for this. But it would be useful from our perspective to understand what underlying margins have been or margins ex those 2 regional areas? Maybe we'll leave that one at a time because I think we've probably gone through it a fair bit.

Yes. David, just to respond to that. I mean, look, this is not public information, just like any business there -- contract business has. And...

What I'm saying, Craig, is, if you if you gave us a margin on the underlying, as we don't know the revenue either, so we would get a better sense. I mean, it's only part of it. And I understand the competition issues. But it seems like Integral for a few years now has been reporting labor cost challenges and more recently in a way that hasn't been reported by others to nearly the same degree. So it does seem like there's some unique issues. Clearly, there are unique issues in the regional areas. But you're almost doing investors a disservice not giving a better sense as to what it is. Obviously, we'll all be pleased when we move past this period. I do want to touch on...

It is more expensive. There's no doubt to service those areas because especially with radiologists on the ground as we do need -- so while a lot of the work can be done by IDXt, we still need radiologists on the ground to do the interventional work. And it does cost more to get radiologists, to encourage them to move and to service those regional areas, in some cases to live in those regional areas so that they can develop the relationships with the local referrers that they need to do. I think the best example you can get if you're looking for numbers would be to look at what hospital EDs have grown by in the regional areas because those ED growth rates have been very high. And you may be able to get those. I'm not sure, I haven't looked because we get access directly, obviously, because we're doing the work. But if you were to look in areas, Western Australia and Central Queensland, there may be some of that data available.

I guess, okay, one final question. I'm not trying to change topics. So when the volume runs ahead of that cap, is the reality that you don't get paid for that additional work, but you do have to service it? So you don't get the additional revenues and you then need to pay locums to do the work? So it's a double impact if you exceed the cap. Is that the right way to understand it?

Yes, we still get paid for the work, but we get paid at a lower rate.

Okay. All right. Let's change topics, if I could. I noticed in the slide deck, and I think, Ian, you commented on it, we've got the lung cancer screening and we've got MRIs. I noticed the comment that you're expecting increased competition or you're cautious on increased competition, if I read that correctly. I was just wondering if you could expand on that, please?

Yes, I'm not sure where the increased competition comes. But for the MRI, particularly, what we're talking about is that the partial licenses get upgraded to full licenses. Competitors also get their partial licenses upgraded. But in many places, including places like Imaging Olympic Park, Queen Street Mall in Brisbane, John Flynn Private Hospital and Southern end of the Gold Coast, those are all partial -- those are all MRI sites where we're going to do very, very well despite -- regardless of the competition because we've looked at the competitive areas. But I think what you may be referring to is the increased competition in anticipation of the higher growth rates that are coming in. And that's really propelled by MRI deregulation and national lung screening and the high growth we see in Medicare overall. So there are more players coming into the industry when they look at the prospects of radiology being as strong as they are. So these are competitors that would be coming in, in anticipation of higher growth going forward.

Your next question comes from Craig Wong-Pan at RBC.

Could you just outline your expectations for the margin of the stand-alone IDX business, the sort of slight margin expansion you achieved in the first half? Is that sort of indicative of what we should expect in the second half?

Craig, look, I'll comment on that. Look, we obviously haven't provided any guidance in regards to the second half. So I can't do that on this call. But what I would say is that there is an expectation that over time, we will -- if you think about the mergers going ahead, we've got increased scale. We haven't really talked a lot about procurement on the call so far. But one of the major work streams that we've got in train is focused around really in a much more structured way, looking at procurement, whether it be on the CapEx side with major suppliers, service agreements on equipment, consumables, facilities maintenance on more of a national level. So these will all be areas that we look at. So I think the expectation put simply remains that we expect EBITDA margin expansion over time, notwithstanding the fact that we've had these higher clinical labor costs in a couple of these regional areas in particular where we have sizable reporting contracts that have a high cost to serve. So I think that's probably all I can really say, Craig.

Okay. And then the Capitol business, the sort of 5% growth impacted by some of the closures of sites. Just wondering for the second half, do those closures of sites still impact the revenues in that period? So should we -- can we expect kind of further similar growth because you're cycling that period where you've closed sites? Or has that washed through now and then the second half should be a more normal industry type growth?

Yes. No, I think you're going to see a continuation of that on the revenue line in the second half. But from an EBITDA perspective, I think we would still expect solid performance at the EBITDA line. This half -- if you look at this half compared with half ended 31 December '23, it was EBITDA growth of about 10%. I say, it's about 10% because in the pro forma numbers we've had to make a few adjustments from an IDX point of view on Capitol's results. But -- so probably we'd expect a continuation of sort of the growth rate that we've seen in the first half at the revenue line, but stronger growth at EBITDA.

Okay. And then last question, just that operating loss of $1.3 million in that capital incurred during the time you had control, does the stand-alone IDX business face a similar loss in that period given the kind of slower, sort of shutdown period or low activity period? Or is that abnormally high for the Capitol business?

No, the -- virtually the same, Craig. I mean, this is sort of across the industry. You'd appreciate 20th of December was right on the cusp of really the Christmas shutdown, New Year shutdown. So relatively low revenue, but obviously with high fixed cost in the business.

Your next question comes from Lyanne Harrison at Bank of America.

If I could just come back to that labor cost. I know we've asked lots of questions on this, but if I could think through what you're currently paying for those locums in those 2 regional areas, are you paying more than you would ordinarily pay because they're hard to come by?

Yes, that's true. That's absolutely true, Lyanne. That's what's driving the higher cost.

Okay. And so, if we think about what steps that the government is taking to bring more radiologists into the country, can you wind back that cost you're paying for those on-the-ground locums over time or when they become available?

Yes, we absolutely can. We've got a shortage of radiologists and particularly in the regional areas. And as we bring in new radiologists at a lower rate, we can service more and more of the work at a lower cost. A lot of these -- a lot of the highest cost, in fact, the highest cost work that we do in the regional areas is flying locums to those regional areas. So when we stop flying the locums, because we've got international medical graduates in those areas, we'll see costs come down nicely.

Okay. And then with ability to ramp up IDXt, you did mention that you're trying to increase the bandwidth there. But is the bandwidth for IDXt in the second half sufficient that you could get your locum numbers to the minimum that you require on the ground?

Well, we're trying. We're still going to need locums in the second half, but IDXt has grown a lot and continues to grow, and we expect IDXt to pick up more of that work. So it will reduce our need for locums. But we still do need locums in those regional areas. Maybe not to the same degree in the second half as we will in the first because we do have materially more doctors working in IDXt right now.

Okay. And if I could move on to the revenue side of things. In light of the Federal government increasing GP bulk billing, have you given thought to, I guess, your volume elasticity with respect to the gaps that you're currently charging? Is there any -- have you given any thought to maybe rolling back some of those gap charges?

We do look at our pricing on a regular basis market by market. There are always opportunities that do present. And the bulk billing incentive program that government has put in place does present more opportunities to us, and we will continue to price according to what the market will bear in each area that we service. On the Capitol side of the business, the previous Capitol clinics, we do a lot more bulk billing, and we expect to continue to do a lot more bulk billing in those practices because we service the GP market in those areas. And as the incentives help the GPs to put -- to see more patients, those patients come through to us. So we're able to service more and to service them efficiently through the bulk billing models that Capitol has.

Okay. But just to confirm, at this stage, your gaps remain where they are and hasn't, I guess, reduced from -- given the cost of living pressures?

We've made no material changes to our gaps, but we do make -- we do change them when the local market dynamics are required. But we've not made any changes like we did a few years ago when we introduced gaps for ultrasound, for instance. We've not made major changes to that degree again.

Okay. And just one last question for me is with the change in MRI regulations or the deregulation, with those partial licenses being upgraded to full, how should we think about IDX's relationships with the specialists to ensure that downstream of referrals?

Excellent question, Lyanne, and that's been a key focus of ours with regard to the Capitol clinics that have come on. So all those Capitol partial licenses, and Capitol has 10 in Victoria, mainly metropolitan regions of Victoria, so regions that are well placed to attract specialist referrals. And we've been working very well with the Capitol MLO team, that's the medical liaison officer team, to upskill them to allow them to access that specialist market. So we've gone out to the specialist market. We're marketing ourselves to specialists on the back of the fact that as from 1 July, we'll be able to service specialists on those MRIs the same way as we're able to service only GPs in those MRIs right now. So we'll be able to service both from 1 July. And because this is a strength of IDX's and that we know the specialist market well, and we're helping Capitol who've historically been much more focused on the GP market, we're helping to ensure that they've got the necessary strength in the specialist market to hit the ground running on 1 July. And I'm very confident that from 1 July as the new MRI licenses come on stream, we're going to see material improvements in our revenue and margin profile as they come on.

Your next question comes from Mathieu Chevrier with Citi.

Just wanted to clarify one thing. I think you've mentioned that you had 4 cash clinics that were closed because they were loss-making. Is that correct?

That is correct, Mathieu.

And sorry, why are they closed? And is that a permanent thing?

Yes. I think this is -- look, I think this is something that Capitol is part of their sort of ongoing review of profitability by clinic. There were a few in their portfolio that just weren't performing. And -- so they've closed them. That accounts for some of the lower revenue growth but improved profitability because of the elimination of the losses.

They were very small clinics and loss making.

There was also in the prior year, so we'll be talking in the first half FY '23, there was a fire in one of their clinics and there was an insurance recovery. That recovery was favorable and so probably boosted that prior period revenue on which they then have to grow as well for this half.

Okay. Got it. And just on the synergies, so Ian, you were talking about the majority of the $10 million within 12 months. How much of that should we expect to see in the actual P&L in the second half of '25 and then going into '26?

Yes. Maybe I'll take that one, Mathieu. Look, we -- again, we haven't put a specific number out there. But other than we're confident in realizing at least $10 million of synergies on -- within the first year following acquisition. The majority of those are called out. Probably 80% of those expected synergies are head count. Yes. We haven't put an absolute number out there in terms of the half year. But look, it's significant. A lot of those head count changes have been enacted, I can say that much. And we've been conservative, I think, in terms of procurement synergies because we just won't know until we've had some of these negotiations with suppliers, bid on Capitol equipment, service agreements, consumables, facilities management, all these sort of areas. But in terms of the first half -- sorry, second half contribution and synergies, I think it will be pretty solid, on a pro rata basis given that a lot of those head count changes were made sort of either pre-Christmas or shortly thereafter.

Yes. Okay. And then just on the lung cancer screening program, you mentioned about $260 million over 4 years. What do you think is your natural market share in that market?

So we would get above our ordinary market share. So if you look at our market share, we're probably in the region of about 12% to 13% right now. But in that market, in the CT lung cancer screening market, we should be well above our weight. So I would see us being in the region of capturing 15% to 20% of that market.

Okay. And then maybe just one final one for Craig. Just on CapEx. Given the revenue growth that you're seeing that seems to be lagging the market, are you revisiting your growth CapEx plans? And then how should we think about CapEx in '26 relative to '25? Should we expect kind of growth along with the revenue line?

Yes. So Mathieu, I think, look, the guidance we provided is obviously for -- to be clear for the full year. So when we've said $40 million to $45 million for IDX and then $20 million for Capitol, just to be clear that's not $20 million for the second half for Capitol, that's $20 million for the full FY '25 year. I think we're at the early stages of planning the FY '26 budget and looking at what the -- both the replacement and the growth CapEx needs will be across the group and where the opportunities are. I think fair to say, we'll also be looking to prioritize growth CapEx on a merged basis where there might be some opportunity for some quick wins. We're not talking individually big amounts, but I think particularly probably on the Capitol side, there are some opportunities there to do some things reasonably quickly that should drive results. So yes, that's probably what I would say at this stage.

Your next question comes from Andrew Paine at CLSA.

Just want to come back to your comments on indexation being a little over 2% when you include the CT impact. I just want to confirm that is since November, not for the full half, just so we can assume that, that's the pricing benefit going into the second half '25?

Yes. I think, Andrew, just to be clear, and I think we've talked about this before at sort of probably the AGM. But the -- if you look at the net impact across the whole of FY '25, so from 1 July to 30 June of the 3.5% indexation and then the 2% -- so 3.5% indexation 1 July, including CT and then the 2% cut 1 November, the blended impact for IDX stand-alone is about 2.7%.

Sorry, over the calendar year '25 or that's the view of FY '25?

Financial year '25. So the Medicare indexation was 3.5% effective 1 July, including CT. And then on 1 November, it was 2% cut CT. I'm just saying for IDX stand-alone, that blended average indexation across all of FY '25 was 2.7% roughly.

Yes. Okay. So that's consistent with our view that, that's a 0.7% headwind for the market, but you say you do more CT. So is that implying that, that 2.7% across the market, you're probably a little bit lower than that?

Well, I think the -- I suppose that's the impact of indexation on IDX. But as Ian called out, the fact is we do more CTs as a percentage of our total revenue than the market as measured by Medicare. And that does explain some of our -- the relative difference in our performance and Medicare numbers.

Yes. Got it. And then just trying to marry up your views on the opportunity in lung cancer. You obviously mentioned that, that's a factor that's driving increased competition and something you called out when you're talking about the underperformance versus Medicare. But you think you can capture higher share? You just mentioned market shares just before. I just want to understand how that dynamic works with you seeing increased competition in that sector at the moment, but still thinking you can capture higher market share when this screening program comes into effect?

So we believe we will capture higher market share because we're overweight to CTs. We also have the low-dose, high-speed CTs that work very well with this program. And we have the technology that allows us to automatically populate the fields that the program is looking for, which would save us a few minutes for each scan. So we think we're really nicely positioned for the lung cancer screening program as it comes in. We're also beautifully positioned for the follow-on work that, that program will generate. So the additional CT that needs to come back, the lung biopsy that needs to happen, and that can be done by a lot of our trained radiologists in that area. And importantly, the PET/CT -- the additional PET/CTs of the lung that will be needed for patients, that picked up as being positive. So the experience overseas shows that a lot of patients, a high proportion of patients have nodules. Roughly 15% of those patients need to come back to have those nodules checked within 6 months or so to see if there's been any growth. Some of those, if there has been growth, will need to go on for lung biopsy and some of those will need to go on for a PET/CT of the lung. And that's why we're nicely positioned to service that continuum. And that additional work is not part of the screening program, but that would fall under the regular Medicare program.

Yes. Okay. That makes sense. And sorry, just to come back on to this. Obviously, the costs have been a focus here. But just trying to understand the phasing of those costs through the half? I know it's related to the contracts and things like that, but it sounded like those contracts have reset through the half. So did you see a normalization of the revenues and the cost in the latter part of the first half? And how do we think about that going through the second half?

I think it's fair to say in terms of those contracts that one of them set in 1 October. So we have seen an improvement there. And the other one will set on 1 July this year. And that one we've not seen as much increase as we have in prior years.

Your next question comes from Rachael Harwood at Macquarie.

Just a quick one on top line. Medicare benefits, I guess, just came out this morning. It looked like a solid month of January, up 10%. Do you have any commentary, I guess, how you're seeing the top line into the second half?

I think, Rachael, a couple of things. The -- We haven't called it out specifically, but I think a continuation of probably what we saw in the first half directionally is what I would say.

Okay. That's great. And apologies if I missed this, but any expectations about your ability to roll out IDXt to CAJ, like any plans in the near term to do this?

Yes, we have started already. So we have been servicing CAJ with -- the CAJ Victoria business with IDXt since about October of last year. And we will soon be able to service the rest of their business with IDXt as well. But the demands on IDXt are really prioritized now to service those regional areas, even though we are doing a fair amount of work at the previous Capitol clinics, and we're still servicing our external contracts, which have also been growing.

Your next question comes from Dan Hurren at MST Marquee.

Look, I just wanted to ask, you talked about the bulk billing incentives that were announced on the weekend and suggested that there is a referral upside. So are you suggesting that there is latent GP capacity in the system? And can you see that in the referral patterns within your customer base?

Can you repeat the question, please, yes?

So you're saying that there's referral upside from the bulk billing incentive, which by cross -- logically, that means there must be latent GP capacity in the system. So can you see that? I mean, have the referral patterns changed to your business as the bulk billing rate has fallen over the last couple of years?

So we think that what will happen is that more GPs will extend the hours and work more. If we look at both our business and at our referrers, radiologists over time have worked less. Especially since COVID we've seen less full-time radiologists and a lot of them are working part time, and we've seen a similar trend amongst specialists and also amongst GPs. I think what we'll see is that the demand will draw more GPs out to work more, especially that in addition to the bulk billing incentive, there's also that revenue -- that cap, that increase that they get when the bulk billing volume reaches certain levels. So we certainly think it will be very helpful for bulk billing levels to approach the 90%, which is what was set out as the government's target over the weekend. And we know that we see a fairly consistent proportion of referrals from GPs that come on to radiology in the region of 10%, 12% if you include both the referrals we get directly and also the referrals we get that the GP sends on to the specialists and then comes into radiology.

I understand that's all the time we have for. I'll now hand back to Dr. Kadish for closing remarks.

Thank you very much. We're obviously disappointed with the market's response to our results and also the outlook. We're very positive about the outlook going forward. And I think it's been underestimated the positive impact that the merger synergies are going to be having even right now and into this half and then into next year. And also the positive impact from these material programs, like the MRI deregulation program, where companies like ours with these 16 partial licenses will benefit from tremendously. And then also the lung cancer screening program, where if the overseas experience is anything to go by, it's been very positive for the industry. So we are obviously disappointed with what we've seen in the market today. And over the course of the next 2 weeks we're looking forward to engaging with more of our investors and maybe explaining a little more of where we see the value and the benefits to ourselves, to the industry, but then more importantly to ourselves and the way we're positioned within the industry as these very positive changes occur over the next while. So the 3 really positive things. One is the merger synergies, at least $10 million, most of which is going to be realized within the first year, already being realized right now, and the other 2 with regard to the MRI deregulation which we're well prepared for and is starting on 1 July this year, and then also the lung cancer screening program. So I think that those have been underestimated given the reaction that we've seen in the market to the temporary blip we see in our regional -- in our cost and our labor cost to service the regional areas. But thank you all very much for your participation and I look forward to engaging over the next few weeks.

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