Sonic Healthcare Limited (SHL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Sonic Healthcare Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Dr. Colin Goldschmidt. Thank you. Please go ahead.

Thank you very much, and good morning to everyone, and welcome to Sonic Healthcare's financial and operational review for the 6 months ended 31 December 2021. Colin Goldschmidt is my name, CEO of Sonic Healthcare. And I have with me Chris Wilks, CFO of Sonic; and Paul Alexander, Deputy CFO of Sonic. And I'm happy to take you through today's results presentation. We're starting with Slide #3, which is our headline slide. And this result, we're very pleased to say is a record result, which has been driven by strong COVID-19 testing through the pandemic over the past 6 months and also growth in our base business. The headline numbers have come up with 7% revenue growth at AUD 4.8 billion. If I say dollars, it will be Australian dollars unless otherwise specified. EBITDA grew at 18% and came in at $1.5 billion, and our net profit is 22% up at $828 million. Through the half year, we have expended $585 million on acquisitions and other investments. And in terms of our capital management, as expected with this strong result, our gearing has fallen to record levels despite the fact that we have strong liquidity at about $1.4 billion. And today, we have announced, and we'll talk about that a bit more, an on-market share buyback of up to AUD 500 million. This will not impact our dividend policy, which has been declared at $0.40 per share for the half, and the dividend for this period is franked to 100%. On Slide 4, in addition to the numbers that I've just mentioned, if I could just take you to the cash generation number, that's a strong number at just over AUD 1 billion, and it grew at 28% over the 6 months before that. And in terms of the cash generation, as you would expect, we've experienced strong cash flow which reflects our strong earnings number and also lower interest payment numbers as well. The conversion from EBITDA to cash was 85%. Similar to a year ago same period, the conversion rate has been impacted somewhat by the volume of COVID testing we've done in the period and increasing debtors and inventory related to those COVID tests at the time. If we move on to Slide 5, just talking about our revenue, and I'd like to split that into just a few points about our base business and our COVID revenue, respectively. And if I could take you to the chart, which probably best demonstrates the two. First of all, our base business, which is the blue bar segments. Our base business has shown resilience through the pandemic over the last 2 years, which is a very encouraging sign, given all the lockdowns and restrictions and safety measures that have been in place. And so our base business is up 4.3% on the corresponding period a year ago. So that's for the half, and up 2.5% on pre-pandemic comparable period. That's the first half of FY 2020. We certainly expect our base business to continue growing as the pandemic subsides, which we all hope will occur. And it's possible also that there might be some kind of rebound because there have been many tests that have been postponed through the course of the pandemic. We're seeing some early signs of that, but time will tell whether that actually does happen. And then moving on to the COVID revenue, you'll see that the 6 months -- in review, our COVID testing was very strong. It was up 16% on the prior period, totaling AUD 1.3 billion. And of course, the question about the future of COVID testing needs to come into play. We are not certain what will happen. I don't know if anyone is because COVID testing is going to depend on the progression of the pandemic, if I could still use the word pandemic because it might morph into something more like an endemic which we hope it will. And if that does happen, then I guess there's still going to be underlying and a sustainable level, we believe, of COVID testing long into the future because this particular coronavirus is not going to go away. So that -- we expect a sustainable level to form as the pandemic dissipates and that will be made up of routine COVID testing for people who get respiratory symptoms. There'll be screening programs. We'll continue testing variants and looking for new variants via whole genome sequencing and also antibody tests, which give an indication of immunity, either to the virus itself or to vaccinations. And of course, we're keen to see how this does play out. But I think the bottom line of this is that whilst we don't expect the next half to be as full of COVID testing, we expect it to drop off slowly as the pandemic subsides. That's barring a new variant coming along. And also important to bear in mind that there are timing differences between the different countries in which we operate. So whilst in Australia, for example, we have reached our peak and COVID testing is now well and truly subsiding, Germany, on the other hand, came late to the Omicron wave and is only peaking now. So if you look at the COVID volumes in January and February in Germany, they've hit record levels, higher than ever before. And then, of course, our other big market, the U.S., it's been a more consistent picture, but the U.S. has well and truly peaked, more or less in line with Australia. And when I say Australia, I'm actually talking about the 3 populous Eastern states where the Omicron wave was really significantly present. Slide 6 is the pie chart that we normally show. Not a lot to add to the pie itself. It has grown 7%. Obviously, our revenue is up to $4.757 billion. There's a slight change in the order of our 3 big divisions. And again, that change relates to timing differences of the pandemic, the Omicron wave, in particular, and COVID testing associated with those waves. So Australia is now in the #1 position, largely because of the COVID testing in the first half of the financial year. And remember, we also had Delta in this period as well, which was less significant in Australia than the Omicron wave. So in Australia, COVID levels reached their peak in December and a bit into early January. And as I said earlier, Germany is now hitting its peak right now. So it doesn't appear in this particular pie chart. The rest of the pie chart is very consistent with the last few pies that we've released. Moving to the country slide, starting with Australian Pathology. First of all, just talking a bit about Australian Pathology's revenue, our base business grew at 1%. And again, this reflects pandemics plural in the period. So we had the Delta wave in the early part of the half followed by the Omicron wave, hitting big time our largest states in the latter half of the half. And this is reflected in the COVID revenue, which is dramatically up. There's also -- it's important to compare -- to recognize the comparative period that we're talking about for each particular country. So that 215% looks very high, but it's compared against a prior period where COVID testing was relatively low. And these differences do occur for each country that we'll talk about. In terms of operations, we've renewed our contract with the federal government whereby we provide COVID testing for all nursing homes around the country. I stress again that this does involve collecting swabs as well, which doesn't really apply in other countries that Sonic operates in. Huge job and a huge congratulations to our staff who've had an incredible task ahead of them and completed it incredibly well. We had a small reduction in the Australian Medicare fee for COVID PCR testing from 1 January this year. It's a reduction of 15%. And just a single comment outside of COVID is to acknowledge the very strong growth of the Sonic Genetics division here in Australia. It's growing far stronger than the rest of our business, which is obviously on a long-term trend, but the growth in Sonic Genetics is pretty spectacular, and we're very, very proud of that as well. Moving on to the U.S.A. where our base business grew at 4%, and we're very pleased with that. COVID revenue was down, on the other hand, 34%. Again, this is comparative issue, stronger testing in the prior period that we compare to. In terms of operations, we've completed the ProPath acquisition that was completed in December 2021. And the integration of that lab is going very well. We have -- we are all very excited about adding such a highly reputable and substantial anatomical pathology to an already excellent division in the U.S. There was to be a clinical pathology fee cut commencing January 2022. That's the so-called PAMA fee reductions, which I think most people are familiar with. That has been postponed for a year at the moment. And when it comes in, we expect the annual impact to be around USD 15 million per annum. There were also some changes to our anatomical pathology fee schedule, but these have now been reduced and are basically negligible in terms of Sonic's financials. And again, I want to call out one thing. In one particular test, and that's our ThyroSeq test, which we have mentioned before. It's a thyroid nodule or thyroid malignancy classifier, a genetic test which we license exclusively and sell and offer exclusively. It's growing very, very strongly. Revenue up 28% on the corresponding period. And I mention ThyroSeq because it's an example of a test that is not just proudly offered by Sonic, but from a financial point of view, it's almost equivalent or it becomes equivalent to a small- to medium-sized acquisition with no capital outlay. So we're very pleased with the performance of ThyroSeq. And it's an outstanding test offering great value to patients with those -- with the relevant conditions. Moving on to Germany, where our base business is not just resilient but strong and grew at 6%. COVID revenue down 15%, but I reiterate again that January and February with record PCR testing is not included in this half. Moving on to the operations. If we talk about COVID testing in Germany, I guess, we're doing slightly more specialized COVID PCR testing than we are in our other markets. So we're doing much more in the way of sequencing of variants and whole genome sequencing in collaboration with the governments in Germany. And Sonic Healthcare Germany has participated in a very fundamental way with, I guess pandemic management hand-in-hand with government and done a fantastic job and offered huge value not just the government's but to the entire population of Germany. Our Anatomical Pathology division in Germany continues to grow strongly. We're focusing on acquisitions as well. And this is still a very fragmented market, and we have a long way to go in that space, with an outstanding base to work from. Another test that I'm very happy to call out and acknowledge is Oncotype DX, which our German division has now licensed exclusively from Exact Sciences, the owners of the test. We will be performing the test in Germany, the only lab to be doing that in Germany, and I believe the only lab in Europe to be performing the test. It is fully reimbursed in Germany. And Oncotype DX is a gene expression test for cancer of the breast. It gives clinicians a good indication of the likelihood of recurrence and the likelihood of response to particular chemotherapies. So we're very proud to be launching that and look forward to the success of Oncotype DX in Germany as we go forward. Moving on to Slide 10, which is the U.K. Our base business has grown strongly. There's a combination here of the comparative period, but we've also experienced pretty strong growth in both the private and NHS base business. And this is -- it includes an element of recovery from the pandemic. But what we're finding is that our private work, GPs and specialists has increased quite dramatically as a result of backlogs within the NHS. And we're watching that quite closely because it's indicating some kind of shift in the marketplace in the U.K. Our COVID revenue is down 20% despite volumes actually being up. And the reason for that is the mix between COVID testing in the public sector versus the private sector. We've set up a surge laboratory for COVID PCR testing in our Halo building in London on behalf of the NHS, and that is public work which is reimbursed at a significantly lower fee than our private work. And so there's been a dilution effect impacting our total COVID revenue. In terms of operations, our Greater London HPV screening contract, that's human papillomavirus, cervical cancer screening, contributes to the growth of that 31%. It was temporarily suspended during the pandemic, but now is back on track and at full steam ahead. Our major private hospital contracts have now been extended for 5 years. And we're very excited and looking forward to commencing operations in a laboratory of ours in the soon to be open Cleveland Clinic London. That is now slated for April of this year. And our new Manchester laboratory, which we have mentioned in a previous presentation, is not just opened and up and running, but doing exceptionally well, processing about double the volume that it was processing in the old laboratory in Manchester. Just quickly moving through Switzerland, where our base business grew at 4% and COVID revenue grew at 15%. The COVID testing in Switzerland, Belgium and Germany are sort of in sync in terms of timing of the Omicron wave. So there's a late or later peaking of COVID testing from the Omicron wave in those 3 countries. In terms of operations, we have upped our capacity to do COVID PCR testing in Switzerland, which dealt with both the Delta and Omicron waves very well. We're also participating in fairly large school testing programs. And we've also, during the period, rolled out a state-of-the-art app for patients, whereby they can access their own results. In Belgium, Slide 12. Base business was down 5%, pandemic-related, COVID revenue down 2%. But as we say in the operations bullet, COVID testing is strong in January and February. We've also taken the opportunity during the last 6 to 9 months to upgrade our core lab instrumentation and particularly our total lab automation system in that lab, setting us up for the future. Now moving on to our Radiology division. Revenue growth was 16%, nonorganic. So that includes 2 acquisitions, Epworth Medical Imaging and Canberra Imaging Group. Organic revenue was 3%, pandemic affected. EBITDA growth is 7%. You'll notice that there is some margin compression in our earnings and that is due, firstly, to the pandemic, but secondly to the relatively low margins in the EMI business. In terms of operations in the Imaging division, I've mentioned that the patient volumes have been impacted by the pandemic, and we'll see the same thing in our clinical primary care division. So patients are a little reluctant to go into radiology centers as they are to go into GP centers. And GPs have dealt with this via telemedicine. In radiology, patient needs to be there to have the examination done. We've also suffered a little bit from elective surgery cancellations, which have been put in place for both the Delta and Omicron waves. And elective surgeries in Australia are now opening up again, and we certainly expect to see an increase in our volumes as a result of that. We've also had staff absenteeism as a result of getting COVID and perhaps of being close contacts of people with COVID and having to isolate. We're largely through that problem now in the eastern states, and it was a problem that didn't occur in the other states at all. We've signed 2 partnership deals with GenesisCare to provide PET CT scanning in 2 of their radiation oncology centers. And we continue to look for growth, not just in terms of acquisitions, but in terms of greenfields and brownfields, expansions of our existing platforms and centers. And there are many of these available. We focus particularly on PET CT and MRI systems, which appear to be really the areas of the future in radiology as we go into the future. Sonic Clinical Services, our primary GP division, primary care GP division. Revenue growth was 7% with only modest earnings growth. What we found is, as I mentioned, that the medical centers have been negatively impacted by the pandemic. But our occupational health business, which makes up a substantial portion of Sonic Clinical Services has rebounded pretty strongly and provide services through the pandemic in an excellent way. In fact, the occupational health division has also got involved in setting up facilities for mines to facilitate COVID testing in remote locations and various other pandemic-related activities as well. As we've mentioned before, this division has been involved in vaccinations in Australia. And we're very proud to be participating in Australia's vaccination programs. I'd have to say that the centers that we operated are now reduced in line with the national effort. I think once everyone was double-vaxxed in Australia. We're now looking at providing the booster shot and possibly fourth, and we don't know what the future will hold. We are standing by in this division to continue participating. At the moment, we're only running 1 center. We previously operated 5 vaccination centers. And we're running that 1 center on behalf of the New South Wales state government here in the center of Sydney. Slide 15 talks about our partnership with harrison.ai which we have announced previously, I think it was in November of last year we announced that. And just to set the scene, we have been contemplating our direction in the space of artificial intelligence for quite some time now, looking at a number of possible strategies to go forward, including partnering with a suitable company. In the end, we've elected to partner with harrison.ai which we believe is a world leader in health care AI. It actually is a very exciting moment for Sonic because harrison.ai is a smart -- it's agile, and it's a medically led company as well, which fits very much with Sonic Healthcare. But importantly, they have actually demonstrated a track record now in health care AI and particularly in radiology. So the combination of harrison.ai with Sonic potentially could be extremely powerful because Sonic brings to the table a huge library of information and resources almost second to none. harrison, prior to Sonic's partnership, had formed a separate partnership with I-MED Radiology Network and they formed a joint venture called Annalise.ai. Annalise.ai then in the space of less than 2 years developed what we believe is the most comprehensive AI solution for the chest x-ray. It's an astonishing product that identifies 124 abnormalities in microseconds and works as an assistant for radiologists. It has been rolled out now into more than 100 Sonic radiology sites in Australia. This Annalise.ai or Annalise.ai joint venture is now working on the next system of the body and it will be brain CT and that will soon be launched. And the plan is for the Annalise.ai then to move through the major systems in radiology. So Sonic's partnership with harrison.ai followed the Annalise.ai. Our investment is slightly different. We have taken a 20% strategic but noncontrolling equity stake in the parent company, harrison.ai. And in addition to that formed a joint venture with harrison.ai, which is yet unnamed, but it will have a name like Annalise.ai. And the aim of this joint venture is to develop best-in-class AI tools in anatomical pathology and clinical pathology. We're going to start off with anatomical pathology. We've already kicked this off in a robust fashion. And we're very hopeful that we will make great progress in a very short space of time as well based on historical achievements of harrison. So moving on to the next slide, which just gives you a quick snapshot of our acquisitions through the year. As I mentioned earlier, we've spent $585 million in the period. and the acquisitions include ProPath in Dallas. That's an anatomical pathology business with revenues of USD 110 million. Canberra Imaging Group, which completed in September last year, revenue AUD 60 million. Our investment in harrison.ai and the joint venture, there's 2 of them. That was November last year. And we've also gladly contributed to an earn-out payment for the performance of our anatomical pathology lab in Trier, Germany. And that acquisition was a good 3 or 4 years ago, but the earnout was achieved well and truly. So it gives you an indication of the strong performance of that business since we acquired it. We continue to work very strongly on the growth of the company. And in addition to our -- everything we do to grow our organic business and COVID testing, we're looking all the time for value-accretive acquisitions. We're also looking for outsource contracts. And I've mentioned the exclusively licensed tests like ThyroSeq and Oncotype DX, which are great additions to our portfolio. So we have an active pipeline of opportunities right now, and we're evaluating those as we go forward. A few words about our capital management. The table on Slide 17 will give you an indication of the strength of our balance sheet at the moment. You'll notice that our net interest-bearing debt has gone up a little bit. That's a result of the acquisitions that I've just mentioned. But our gearing is pretty low, interest cover very high and debt cover at almost record levels. So we're very, very well positioned at the moment for future acquisitions. And if you go to the next slide, which is Slide 18, a few words about the announcement we put out this morning about an on-market share buyback of up to AUD 500 million. It really is in response to our gearing being at record low levels and our desire to move towards our long-term averages. So the chart on the right gives you an indication of our debt cover ratio with the dotted red line being our long-term average. And you can just see how it has fallen down over the last year or 2. So despite our aim to bring these metrics back to long-term average, we don't believe there will be any impact on our ability to make acquisitions going forward. So the $500 million share buyback, up to $500 million will take place over 12 months. And it really is an approach to adjust our capital management. It's a fine-tuned mechanism, which will add value to shareholders, something like low single digits, an increase in EPS. Our dividend for the year on Slide 19, not impacted by the share buyback at all. The Board has declared a $0.40 per share dividend for the half. Good news is that it's franked to 100%. This keeps our progressive dividend strategy intact. Record date 9 March, payment date 23 March. Dividend reinvestment plan remains suspended. Moving on to the next slide to talk a little bit about our sustainability and ESG initiatives. First of all, the E, the environment, we will -- by the end of this year, be reporting global data for Scope 1 and 2 emissions. Previously, we've only reported for Australia and the U.K. We're also participating in energy RFPs right now and considering a number of renewable options. We're also accelerating our global programs to reduce waste, reduce emissions and reduce energy consumptions. We're on track to develop and to announce our net zero emissions target hopefully, by the end of this year and most likely at our AGM in November. On the S component of ESG, the social component, we continue to focus on our employees in a big way; on employee health, employee safety and their well-being during the pandemic. We're also strengthening the formal goals for -- and this is on a global basis, for staff engagement, diversity, inclusion, training and development. And we've also established the Sonic Healthcare Foundation, which I'll talk about in a second with an initial contribution of AUD 40 million. And on the governance side, we've issued reports on corporate responsibility and modern slavery. We're continuing to strengthen and expand our sustainability leadership group in all our divisions. And our aim is really to achieve our goals and also to keep all our stakeholders in mind as we progress with this very important initiative, that really forms an integral and a highly important part of Sonic Healthcare as a whole. The Sonic Healthcare Foundation, Slide 21, we've established the foundation itself. And it very much is a part of Sonic's commitment to support communities. We have -- we believe that this is very much in line with what we have been doing in this space and also that it fits very well with our medical leadership culture. We've contributed the first AUD 40 million into the foundation, but we have not yet determined the mandate and mission of the foundation because we plan to do that in collaboration with our global leadership teams. But essentially, the foundation will cover charitable donations and medical research, including very much all the research that occurs in Sonic Healthcare by our own people. So once that mandate is finalized, we will formally launch the Sonic Healthcare Foundation, very, very proudly indeed. Looking ahead, Slide 22. We have not provided guidance and the reason for that is that COVID revenues remain highly unpredictable, and you can get an indication of that from the chart that we've provided. We've gone through to January. February is looking like it's going to be a very strong month. And then who knows what will follow after that. We're also providing January's total company revenue at $818 million, which is 18% up on the prior period at organic level. And just a comment again about the variability of COVID testing by country. It's still high in Europe, slowing in Australia, slowing in the U.S.A. The base business is resilient throughout the company and continues to grow. And there is a chance, perhaps more than a chance that there will be a potential post-pandemic rebound given all the tests that appeared not to have been done during the pandemic. And of course, our outlook is going to be affected by possible acquisitions from the pipeline that we're currently evaluating. And on to the last slide, which is a summary of what I've been saying. First of all, the result is a record result, which is driven by COVID testing and growth in our base business. We certainly expect COVID testing to continue into the future with a sustainable level which will be dependent on the outcome of the pandemic/endemic situation. We've spent $585 million in the period, and we have an active pipeline of opportunities under evaluation. Dividend of $0.40, which is 11% up on the prior period, 100% franked. We've announced a share buyback today as part of capital management. And we're going ahead very strongly with our ESG initiatives, including the establishment of the Sonic Healthcare Foundation. Our balance sheet remains very strong, taking into account the share buyback not going to influence our ability to make sizable acquisitions into the future. I just want to end by making the comment that our medical leadership culture, which has really driven Sonic now for decades, into the strong position that we are today. I can say that it even strengthened further over the course of the pandemic. The pandemic was such a huge event for us as a lab company in particular, with all the COVID testing that we've done. It's really had the effect of bonding people together in the delivery of an outstanding service to the community. And I have to say that I feel that our fine reputation has been nothing more than enhanced a whole lot further over the 2-year period of the pandemic to date. And I want to end by just saying a huge big thank you to everyone in Sonic Healthcare because everyone has participated in one way or another to an outstanding result and an outstanding achievement for the company itself. Thank you very much, and I'll hand you back to our operator for your questions.

[Operator Instructions] Your first question comes from Ms. Lyanne Harrison from Bank of America.

I'd like to start with your outlook slide. And if I look at your January revenue numbers and strip out the COVID revenue, it looks like the base business is growing in the low to mid-single digits. And so if I think about second half '22, particularly the strong growth you're seeing in the base business in the U.K., what are your thoughts of that continuing at that elevated level? And also can you talk about the rate of recovery you might be seeing or you expect to see from other geographies?

Yes. I mean I think you've probably said it all that the base business is growing at roughly those levels you're talking. I just have to reiterate there could be some rebound in the base business, and this is assuming that the positive dissipation trend of COVID-19 continues. Look, I mean, all I can say about this is that we have a very strong company in all the countries that we operate. So if you take our operations in 7 countries, these are just extraordinary in every respect. They're so well connected, well resourced, particularly in terms of the people in them, they're experienced people. And so when we get through the pandemic, the drivers of growth remain unchanged. People will then revert to where they were and looking after their own health again. Everyone has been quite focused on COVID, understandably so. And so we're very encouraged by this. And we think that if COVID goes away completely even, which we don't think it will do, the company will continue to grow strongly at organic level. So this is not acquisitions at all. I guess we can't be more specific than that, but I think you've analyzed it correctly yourself.

Okay. And just another question then, if I can talk about COVID-19 volumes. So obviously, historically, that's tracked COVID cases. But if I think about whether it's subsequent waves, if there are any going forward, how do you think that might play out when you -- in terms of PCR testing versus rapid antigen testing going forward?

Yes. So this is a factor that has come into play. And I haven't mentioned rapid antigen tests in this presentation because we basically don't do them. But they have, in some way, influenced the PCR testing around the world. Germany went through an intense period of PCR testing around about the time of the Delta wave and then withdrew the free rapid antigen tests. Rapid antigen tests have limited value. Whilst there's no doubt that they reduce the amount of PCR testing required, the sensitivity of the test is low. That means low in low viral load situations. In other words, people who are asymptomatic, where you're doing it as a screen test and particularly as a one-off screen test, the sensitivity is very low. You're going to miss something in the order of 1 in 2. So there will always still be the need to go to the gold standard test, which is the PCR test. But we recognize that perhaps we've moved on from there in a sense that -- and if the pandemic dissipates further, people will use rapid antigen tests, but I think even that will be on a limited basis as people realize the limitation of the test. So if you're doing a rapid antigen test on a regular basis, every couple of days or every day, then they're very good. And if you get a positive rapid antigen test, that's excellent because the specificity is very high. So a positive test is almost always correct. It's missing the negatives that is the real problem. So I think going forward, if we get further waves, our labs right around the world are standing ready to participate in PCR testing, should that be needed. We have all the equipment and resources and infrastructure and logistics to deal with that. I guess that's really all I can say. But predicting what's going to happen into the future becomes very difficult.

Your next question comes from Mr. David Low, JPMorgan.

Colin, Chris, Paul, can I start just talking a little bit about costs, particularly cost inflation. We're hearing a lot about it and how that's impacted the business. In the same breath, I noticed that consumables cost was actually down in this period. I'd be very interested to understand what's driving that as well, please?

I'll hand this one to Chris.

Yes. Thanks, David. Look, there's a few factors here. You'll see that our consumables as a percentage of revenue has dropped about 170 basis points. Now some of that has to do with some renegotiation of the COVID kit prices in various jurisdictions, but also a bit of a reduction in the number of -- in the cost of things like PPE, which was probably at its peak in the pre-CP. So -- but it's also true to say that our procurement teams have still been running RFPs and have been getting pretty positive outcomes. So we're not really seeing any real pressure. You'll see that there's actually -- even though our revenue is up 7%, our consumable spend is down about $20 million. So we're not seeing that cost pressure on that side. And likewise in labor at this point in time, we haven't seen that sort of pressure starting to come through. I know there's talk about inflation. People are still scratching their head as to whether or not that's a little bit of a COVID inflation blip or whether it's going to be a sustainable matter. But we're not seeing anything -- at this point anything material. It's more along the normal 2.5% increases in labor costs. So something we'll keep an eye on. We're always as an organization looking at ways we can become more efficient in our operations and using IT and the like to drive that. But at this point in time, we're pretty comfortable with where we sit in terms of cost pressure.

Great. And if I could just move on to COVID. We heard a fair bit about pooling of tests, particularly in Australia. Just wondering whether I could get someone to comment on does -- did Sonic pool tests there as the positivity rates go up? Does that change the profitability of providing PCR testing? And in the same breadth, if you don't mind, Colin, I know you haven't given guidance. Your U.S. competitors have. I'm just wondering whether you've seen that, whether you've got a view on it. In particular, I see that you're forecasting 60% to 70% drop in COVID testing this year on last. Just wondering whether you agree with that or have a view at all, please?

Yes. So to deal with that last bit, we did see those predictions. I'm not sure how they have come to that number or those numbers. And I wouldn't want to say agree or don't agree. It's just don't know. We've been very wrong before in terms of how we go forward. I think on the assumption that we're emerging from the pandemic, then I would agree with those numbers. But that is an assumption in itself. And hopefully, for the world, that does actually happen. So we're all hoping that the pandemic dissipates and continues on the path that it is at the moment. To your first point about pooling, Sonic only did limited pooling of PCR testing. We're aware that some of the other labs really went to town on pooling. Our pooling was very limited. Now as you probably know, pooling does work when the positivity rate is low. Once it gets above a threshold, it's more work to be pooling than not to be pooling because if you get too many positives in your pool, you've got to go back and then test all those in that pool individually, which takes up a lot of time and energy. So our pooling was very limited, and we -- I think part of the problem in Australia where the turnaround times blew out were some labs that did quite extensive pooling, which is perfectly correct in terms of accuracy and lab practice. There's no issue there at all. But once you have to stop pooling, your throughput in the lab drops dramatically. And that happened, the positivity rate went up at the same time, the demand for PCR testing went up, and that kind of drove the whole problem that we had around about December with capacity issues of PCR testing. If you go to Sonic's -- I don't like only talking about Australia with COVID testing. There's a perception that we're just Australia, we're not. We do huge amounts of testing in other locations. And if you go to Germany, the U.K. and the U.S.A., again, our pooling was very limited. I mean, in some places, not at all. And so it didn't really affect us in a way that it might have affected some other labs.

[ I think we're saying on the ] pooling, the motivation for pooling wasn't the cost control. It was a capacity expansion which occurred generally in the early days of the pandemic when access to kits were somewhat constrained.

Your next question comes from Mr. Chris Cooper, Goldman Sachs.

Colin, can I ask on the base business? I thought your comments were a little bit mixed today. I mean, generally speaking, is the recovery running at the level you'd expected to see by now? I know in the U.K., you point to some early signs of a shift. I thought Belgium was interesting where COVID revenue was down, but also base business was down suggesting that, that wasn't really purely COVID disruption that led to that decline in the base business. Could I just get a bit more color on where we are in the cycle in the base business? I appreciate this differs by market, but like I said, it feels that your comments are a little bit mixed.

So overall, our base business is growing, whether you compare it to the last year -- the last PCP or the one before pre-pandemic. It's not growing at -- over the period of the pandemic, it hasn't grown at the long-term trend number as expected because generally, what happens is where there was pandemic wave then your base business numbers fall. So we've had to incorporate those waves into our numbers. In some ways, it's been advantageous to be geographically diverse because it hasn't been at the same time in all these countries. I mean we don't see any problem with our base business. Our base business has been a little suppressed because of the pandemic. And as we're coming out of the pandemic, we're seeing the base business returning to long-term growth percentages. And there's a possibility that there could be a rebound. So I guess that's really the summary of it. It will be slightly different in different countries. Yes, in Belgium, which is a very small market of ours, there was a greater pandemic effect in this half than perhaps in some of the other countries like, for example, even in Australia. And also it depends on the nature of the business in those -- in each of our countries that we operate. So remember, we've got a mix of business, which is GP, specialists and hospitals. Hospitals have got more affected -- the hospital referrals have been more affected than, say, the community referrals. And then if you go to general practice, it depends where you are. We're -- because general practice has been affected, patients have not wanted to see GPs. And GPs have had to change their practice into telemedicine and auto pathology and radiology via telemedicine. So it's a complicated situation that's occurred through the pandemic. And quite frankly, I've been very encouraged by the enormous strength of our base business in the face of a pandemic because at the start of the pandemic, it wasn't very clear how this base business would be impacted. And I have to keep stressing that the drivers of testing remain exceptionally strong. So it's diagnosis of disease. It's new tests. It's aging of the population, and it's preventative medicine. These things are critically important. And we sense that as we emerge from the pandemic, people will return to their GPs, return to colonoscopy centers, return to specialists. And those clinicians will resume their activities. I've heard clinicians say that they have a huge catch-up job to do. This is surgeons in particular. And the only way that they can actually catch up, in addition to doing the daily routine loads, is to work on weekends and at night. This is surgeons. So you could just -- that's one aspect of our business. And if you think about that, that does drive additional volume into our businesses should that occur. Now I think in Australia, where we're involved in 3 specialties and get a good idea of the whole market, I think that's probably going to happen. It could well happen in places like Germany and the U.K. as well, where surgeons, for example, have fallen behind with the nonurgent work. And they will need to catch up by working additional hours essentially. So there, you get an indication of how we look ahead towards the base business. I think it's going to be as strong as we exit the pandemic. That's my bottom line take of it.

Okay. And then one, if you don't mind on capital deployment, I know the preference has been M&A for quite some time. It just seems the transaction activity just can't really keep up with the levels of cash generation from COVID. Even after the buyback today, you've still got about AUD 900 million of liquidity. You clearly expect COVID to contribute meaningfully for some time yet. How open are you to increasing or extending this buyback program as we go through the year?

Chris, maybe I'll answer that. It's Chris here. Look, I guess one of the reasons our Board has chosen run with the on-market buyback is it's a pretty flexible tool. So we -- as Colin said, we are looking at M&A. There are opportunities and some opportunities sitting in our pipeline that are under evaluation. But so if a large transaction was to come along, that we were attracted to, we can terminate the buyback. On the other side, if we -- if after 12 months, we haven't been successful in deploying capital in synergistic M&A, we could extend potentially the buyback. So I guess it's just a message to the market that we are mindful of capital management, and it's a bit of a steady hand on the tiller, if you like.

Makes sense. And could I just squeeze in 1 more. Just your thoughts on the Ascension deal with Labcorp if you don't mind? Presumably, that's something that would have also fit well with your business in the U.S. Were you involved in those discussions? Does the new relationship have any impact on you guys?

No, it won't have an impact on us. We know that business pretty well. It's quite a spread out -- geographically spread out operation that perhaps didn't suit Sonic's geography entirely. That's, I guess, all we could say at this point.

Your next question comes from Mr. Andrew Goodsall from MST Marquee.

Just coming back to the base business recovery. Just wondering whether you see COVID as changing anything as that business comes back. So for instance, telehealth, or whether some of the smaller players have gained any share through COVID?

So Andrew, we've obviously kept a sharp eye on that question, and we have not noticed any loss of share through our operations. I'm actually thinking that because of our very active participation in the pandemic, it could actually be the other way. I just don't see any change in habits. Yes, there might be a change by some clinicians to do more telehealth, but they're now fully enabled to order lab tests and radiology via telehealth. And I think there has been a period of accustomization to that process, the process of ordering lab tests and radiology via telehealth, but it's now working very, very well. I do think that patients want to -- the feedback we're getting is that patients actually do want to get back and see their doctor. And -- so how much telehealth will persist longer term is another one of these variables that only time will tell. We cannot predict it. There is still a base of telehealth going on right now. There are few doctors who prefer telehealth. And again, it's part of the unpredictability of the environment we're in at the moment. I can't tell. But I think just like we've all got accustomed to Zoom meetings. Who was using Zoom before the pandemic? Which GPs were using telehealth before the pandemic? And so we're now going to continue using Zoom meetings and probably some doctors will continue using telehealth to some extent, post pandemic as well.

And just continuing with that recovery, just understanding -- or just trying to understand if historically, you've seen any ratio of how many tests that are missed actually are done in the recovery phase. I'm just thinking perhaps some of the more routine or regular tests might get missed but screening has got to come back, surgery has got to come back. Just trying to get a sense if you've got a broad ratio there.

Yes. And so Andrew, I dare not quote anything without precise information, but there have been quite a lot of papers published on this and articles written on this. And you are correct that it's not just at the higher-end elective surgery level. It's at basic test level like pap smears and blood sugar levels and cholesterol testing levels and PSAs for prostate. A lot of those have not been done on -- at the same rate that they were or should be done normally. So -- and this is potentially a problem for the nation. So if people are having less colonoscopies, for example, the rate of bowel cancer will go up. And you can apply that to a bunch of other tests as well. And so I just have to say again that when we stop focusing as much as we have had to do on the pandemic, I think the attention will shift back to these important issues, preventative medicine, how do I look after myself, what tests should I be doing, have I missed my mammogram, have I missed my regular blood pressure checks? All of these lead to disease. They're not frivolous in any way. So I believe that there is a chunk of these that have been ignored through the pandemic, of necessity probably. And they will come back and come back pretty strongly.

Just a very quick final one for me. Just your cash flow conversion was a little down on the full year on an adjusted basis. I'm just wondering sort of what was behind that. And we have seen some press around just the start of this year, I guess, on sort of a federal state-type dispute going on here in Australia, just whether there's any sort of cash flow delays there?

Andrew, it's Paul here. In terms of our cash conversion, it really was to do with the ramp-up of testing in December to handle the December and January Omicron volumes. And we had pretty much exactly the situation -- the same situation the year before. So cash conversion was about the same level at December. And then what you saw in the second half of last year is that we collected those debtors, we used that inventory, et cetera, and by year-end, we were back to normal, close to 100% type levels. And we would expect to see the same thing here again, of course, unless there's a wave that hits in June. So nothing to do with state or federal funding here in Australia. Obviously, that's a very Australian issue versus our global group. But no, we're not seeing any impacts on cash flow based on that particular issue that you're raising here in Australia.

Your next question comes from Ms. Gretel Janu from Credit Suisse.

Just firstly on inventory. They remain quite elevated, roughly 2x the levels that they were pre-COVID. So as COVID testing levels are starting to subside I guess how are you thinking about the appropriate level of inventory that you're holding going forward?

Paul. There's no question that the inventory levels were higher at December for the reasons that we were just talking about. So -- and if you look at the volume or the revenue for COVID that we disclosed for January, you'll see why those symmetries were high at that point. They will clearly come down. It will depend on -- sorry, depending on the level of COVID testing that we're doing at any point in time. And I guess, if COVID really subsides, it will go back more to like our long-term leverage levels, obviously, recognizing that we are making acquisitions from time to time, and so there will be some additional inventory associated with those.

Understood. And then just in terms of COVID reimbursement. So you discussed the 15% reduction in the Medicare fee in Australia from the beginning of this year. Do you anticipate further fee reductions from a Medicare perspective. And I guess what else is happening or has happened in the other regions from a COVID perspective? .

Again, I'm not able to answer that. We don't really expect another fee cut. We've had slight reductions in our fee in the U.S. on an average fee basis and a small one in Germany as well, but that's quite some time ago, similar to the Australian adjustment. But we're not expecting anything more. And I think the pressure will largely be off as COVID volume -- or COVID testing volume subsides. So the payers, I think will be taking a different view of this, and the focus shifts towards rapid antigen tests and other stuff.

Your next question comes from Sean [ Loomis ] from Morgan Stanley.

Colin, I'm just wondering, similar question to last time. Could you give us some broad commentary on what you may be seeing in asset prices in the market for consolidation. I mean, on one hand, you've probably got vendors at a subscale pre-pandemic and are probably quite willing to sell. And then now you've got the same vendors with the blessing of COVID testing, making the profitability situation very different. So the shingle at the front of the shop has never looked so shiny. So can you give us some -- a bit of a flavor of how you're thinking or how you're seeing asset prices in the market for M&A?

Yes. And I think that's just a great issue to look at, Sean. So you're dead right that the shingle is shiny. I love your words there with the COVID testing. And so obviously, it requires quite a bit of discussion and negotiation to shift -- or to sift out the COVID earnings from the underlying earnings of a target or to work out some kind of earnout arrangement, whereby both parties agree that this is not going on forever. We're at a peak level of testing. You can't value the business on earnings that will be gone whenever they've gone, but they are going to go. And so there are a number of means that we have adopted to deal with this question and deal with it fairly so that the vendors don't feel that they're not being considered as well. And so whilst it initially did appear to be a problem, the targets that we have spoken to and I include ProPath in this, where we had the problem itself, if I can call it a problem. It was dealt with in a fair and equitable way. I think you're right that there are also a range of smaller players who were never significant in a sense, but who became significant, and there's quite a number in the U.S. because of COVID testing. So all of a sudden, these small labs start doing COVID testing and can ramp up volumes and put their head up as a potential target for acquisition by one of the larger entities like Sonic. So we've been very aware of all this. And then if -- so that potentially could affect asset values. But if you take that out, in terms of the multiples being paid, I don't think there's been a huge amount of movement. We haven't found that once that the COVID issue is removed, there's no particular problem for us to go forward in terms of multiples.

Colin, sort of down the same track but maybe not. I mean you've talked about growth in the genetics business as being exceptional, something along those lines. And in the past, you've talked about that, but it sort of remained fairly immaterial, I think, in your words. But at what point can we expect it to be material? And following on from that, with respect to M&A, do you see yourself kind of sticking more in the broader laneway of routine testing? Or do you think there's sort of opportunity to build that business out inorganically?

Yes. So the answer is yes to everything you said there. Except answering the first question, when will genetics become material, I'm not sure what your definition of material is. But it is moving in the direction of becoming material, and I predict that it will definitely be material into the future. Genetics is very much the future of medicine and laboratory medicine in particular. So there's more and more genetic tests that are available and that we are offering which are making a huge difference to the management of patients. And I've given 2 in the presentation today. So Oncotype DX is 1 example, where -- I won't say that's material on its own, but when you add it to the rest of the genetic testing that we're doing in Germany, for example, it probably is material, and it will get bigger and bigger. Again, it depends on definition of materiality. In terms of organic and inorganic growth in this space because that's an interesting question in itself. In Australia, we have grown Sonic genetics organically, essentially starting from scratch. We didn't buy a genetics business. And -- but we have attracted outstanding genetics people, genetic pathologists, senior scientists, various other people who have the talent and ability to actually set up new tests which is what this is all about. And then to hook on to this fast-moving environment that genetics is. So newer and newer tests come along. And we've now built Sonic genetics into something pretty substantial in the Australian health care space, if I could put it that way. I'm not sure if we're the largest, but we certainly would be up there as one of the largest. We don't know exactly how big some of the public genetics players actually are. In Germany, for example, we have our genetics operations in Bioscientia which is a very big operation and one of the finest genetic labs in the whole of Europe. And that lab is also just growing at a pace. And then if you move to the U.S. we look around and say, is there a genetics lab that could be a potential acquisition. And we don't want to exclude that as a possibility. It might actually happen. We are providing more and more genetics tests on an organic growth basis there as well. But I guess, that pace could be sped up if there was a suitable acquisition out there. So I hope that answers the question that you've asked.

Your next question comes from Mr. Saul Hadassin from Barrenjoey Capital.

Colin, Chris, Paul. Colin, can I start with a question for you, and that's just discussing base business revenue growth across some of the key regions. Just noticing the sort of disparate rates between Australia and, for example, Germany, 1% versus 6%. Is the expectation there that Australian-based business revenue growth improves as some of that catch-up work potentially comes back? And then do you think, looking at those base business growth rates in Germany and the U.S.A. as well, do you think they're representative of what you're likely to be able to achieve looking beyond FY '22? Or do you think there'll be some moderation of those growth rates?

I think we will settle after a period, and I don't know how long that might be, a year or 2 or 3, we will settle back into the long-term growth trend number, which is something like 4%, 5%, something like that in terms of volume growth. But what happens before that is really unpredictable. We've discussed here that there could be rebounds. And if you have a rebound, what will happen the year after that, when you're growing off on a high base and then again on a low base, et cetera. So it is a little unpredictable at the moment. But I think one thing we can be sure that as societies returned to normal as is occurring here in the eastern states of Australia and in the U.S. and in the U.K., our base business is rebounding pretty strongly already. In Germany, where they're still peaking in Switzerland and Belgium the same, our base business volumes are slightly depressed at the moment as you would expect. So we have found this throughout the whole pandemic. And in previous waves, we actually would say to the market that as COVID testing went up, then base business would go down a bit. They were -- it was an inverse relationship. I think that has softened a bit now, and we're getting now, again, I'd say hopefully to the end of the pandemic. And I'm just sure that we will perhaps rebound a little, but then eventually settle into the long-term growth rate. I don't think there's any good reason to think that the long-term growth rate will eventually be the rate that we'll be growing at. That's at organic growth level.

And then if I could, just a couple of quick ones for Chris. Because the $40 million expense for the initial contribution to the foundation, was that expensed in first half '22? Or will that be a second half P&L cost?

No. Look, it has already been expensed. There was a little bit of an allocation in the previous June results and then it was topped up in this really strong half. So that $40 million puts us in good shape for all we plan to do for the foreseeable future, whether it be just expending the return on that $40 million or even using -- dipping into some of the corporate's over a period of time. But I guess we thought that this outperformance we've had, it's an opportune time to build up a chunk of capital that we can use for those various projects we have around the world. There's no future effect, is what is the answer, yes.

That's helpful. And just on labor cost, Chris, you touched on this that you haven't seen any significant labor cost pressure, but the dollar cost itself was up over 5% in the half. So I'm just wondering if that was additional heads that came into the business during the half? Or was it things to do with penalty rates or overtime work in the half due to COVID. Just wanted to get a sense of why that cost item grew that rate.

Yes, it's probably more a function of the revenue growth of 7% and the labor being a normal proportion of that, and it probably varies by jurisdiction. Paul, do you have any more you'd add to that? .

I mean, clearly, just in terms of dollar cost growth, if you add in the acquisitions of Canberra Imaging and ProPath, there's a workforce there that we've inherited for those businesses. So that's part of it. But I guess, more importantly, which is what Chris is touching on, as a percentage of revenue it's actually down by 70 basis points. So I think that's a pretty good outcome.

And I think we mentioned previously that there was some restructuring of the labor force in our U.S. business that happened at the start of the pandemic and those sort of structural changes remain in place and should flow through once the pandemic settles down.

I guess the point was the labor cost pressures have been evident across the health care space more broadly and on a global basis. So it's just -- I guess it's interesting to see that it hasn't been a significant consequence to you guys in the half.

It was something we're quite happy about, to be honest.

Your next question comes from Mr. Craig Wong-Pan from Royal Bank of Canada.

Just on radiology with the margin compression, why does Epworth Medical Imaging have lower margins? And is there opportunity to improve those?

I'll give this one to Chris.

Yes. Look, it's a business that we bought -- Paul remind me when did we buy the...

In April '21.

So there's an element -- there's a couple of elements here. One, it's a hospital-only business, and those sort of businesses, the margins are a bit lower than the community-based businesses in our experience. And two, it was managed, I don't want to be too disparaging here, but managed largely by the Epworth team, which is it's not their core business. We had an interest in it, but the -- there was a lot of involvement of the Epworth team. And so I guess, we've inherited a business that does come from a lower base, and we're pretty confident over time that we can improve that. We're also looking at expanding into the community more in the Victoria market where we haven't been before. So that's an opportunity to use the MI business as kind of a base for broader expansion.

So Craig, just to add to this, a radiology business that is exclusively hospital-based is much more expensive to operate. You've got to be operating 24 hours. You're doing work in theaters. It's expensive. Our plan, as Chris has alluded to, is to use the excellence of Epworth Medical Imaging, and it is an excellent practice with outstanding radiologists to -- as a platform to expand into the community in Melbourne and Victoria more broadly. So I guess it's a matter of just giving us a bit of time there because we've already commenced that process. And we think that in time, those margins will most definitely start rising.

Okay. And then second question on your harrison.ai investment. Given that's a 20% investment, is that going to be an associate, so would there be any kind of profits or losses that might come through as earnings from associates? And then secondly, I guess, given that it's a reasonable size investment, what kind of return or benefits do you expect to get from that over time?

Yes. Look, it will be -- it won't be equity accounted, right? It will be...

Correct. It will just be treated as an investment equity accounted. So that's the answer to the accounting. Going forward, and Colin touched on it when he got to this slide, the potential of this could be significant. We are looking at -- in conjunction with our joint venture, to creating tools that will be applicable for pathology and will not only be used in Sonic's businesses, but will be a product that potentially if we lead the market, it could be sold around the world and improve efficiency of pathologists and maybe -- certainly it's part of Harrison's motivation is to try and take some of these tools to parts of the world that have a real shortage of pathologists. So we're quietly confident that we could build something of significant value with this initial investment. And the investment obviously gives us an indirect investment in the radiology arm as well the Annalise arm that's already up and moving forward at a pace.

Okay. And just a follow-up there. With the Annalise.ai wanted to know how long that took kind of get that commercial product out there. But is there any kind of time frame do you think where diagnostics of pathology AI products might be able to be launched?

Yes. So I mentioned in the presentation that the chest x-ray module was done in under 2 years, which is very fast at this juncture in health care AI. And what we believe will happen now with our joint venture with Harrison is that the rate of achievement of modules will actually speed up. Harrison has now got the experience, and now much, much stronger staffed. We're commencing with anatomical pathology. And I can't really express this enough that the strength that Sonic brings to this partnership is absolutely enormous. We've got outstanding pathologists and other staff and infrastructure and information that will make the job a whole lot easier. And when you couple that with Harrison's agile technology, as proven with Annalise and the chest x-ray module, we believe that we can begin achieving results fairly quickly. Now I mean I can't give you a time line, Craig, because we haven't really announced where we've started, what we're doing. But what Annalise did was actually leapfrog the whole world in terms of AI in the radiology space. We honestly believe that, that they are the #1 product. That is the #1 product available in the world today. So I think you've now got a combination of Harrison.ai and Sonic healthcare in the pathology space, anatomical and clinical. And so we're hoping to achieve great things together. And I think it's very possible because everyone in Sonic is very excited about this, as are the Harrison.ai people as well.

Your next question comes from Mr. John Deakin-Bell from Citigroup.

My question was just around the margins going forward. Obviously, as the revenue has been very elevated, margins have expanded. But are there costs that you've had to add in the business? So if COVID revenue declines quickly that margins might overshoot on the underside until you can take the cost out of the business. How should we think about that over the next 2 or 3 years?

So John, this is -- the whole COVID testing phenomenon really did demonstrate the leverage in our business. And if you have a big operation like Sonic healthcare and the big labs that -- around the world that we're doing COVID testing in Sonic, we have not really had to add enormous manpower other than in specific areas. So for example, in the molecular lab that does the COVID PCR test, yes, we required a lot more people. Those people, as COVID testing subsides are trained as molecular testing scientists and can be redeployed for other molecular tests that we do. We didn't have to put on many more couriers, for example. We did have additional staff to man drive-through centers in Australia only. We didn't do collections overseas. But those were generally short-term employed staff who only did nasal and nasopharyngeal swabs, and that's not going to be an issue. The people at the front end of the lab because the volumes went up so much with COVID testing. So these are data entry and specimen reception staff. Yes, we did need to take on more of them. But again, there, we have a very flexible staffing arrangement anyway because we've got to deal with seasonal fluctuations and even fluctuations within a week, the days are different. So we've set up those departments to be flexible depending on demand. So that's a long way of getting to the answer that we don't believe there's going to be any residual inefficiency due to additional labor cost as COVID testing subsides.

And just maybe one for Paul. I note on your Page 8 and of the accounts, where you've given us previously the split between the labs and the imaging business at the EBITA line. It's now something we don't see often or ever net profit before tax. Why the change? And is there any way we can kind of work out what the EBITA margins are.

Yes, John, the change is as a result of the accounting standard, AASB 16 for leases. So we want our management teams to continue to be accountable for the full cost of leases in their business. And if you look at EBITA these days, that means you're missing the interest cost that's implicit in those leases. So we've moved our internal measures to this EBIT -- sorry this NBPT measure. And under accounting standards, your segment reporting is supposed to match your internal measures. So that's why we've made that change.

We haven't had time to go through in detail. But have you split out the amortization from the depreciation in here? .

No, we haven't.

Can you do that because that a way we can kind of -- we can go back to working out what the previous will be.

Well, I think, well, we haven't. I mean that's the -- that's where we stop. I mean the accounting -- we're now complying with the accounting standards that are in place going forward. So we're not sort of trying to work backwards to what the profit used to look like under the previous accounting standards. We've obviously restated the comparable or have the comparative in the same format so that you can see trends in the business. It would be safe to say that probably the underlying numbers would have grown proportionally to the revenue, we might get close by -- going backwards, but yes the challenge we have with moving forward with these new standards.

No, we understand it's challenging from this side too.

Your next question comes from Mr. Steven Wheen from Jarden.

Colin, Chris and Paul, just sorry to be back on the base business again. But I wonder just particularly Australia, the 1% growth relative to Medicare growth. I mean, Medicare seemed to be of the same period ex-PCR testing growing at around 5%. have you got any way you might be able to help reconcile those differences?

Steve, I'm not sure if that's correct, the 5%.

I think we saw that it was a negative number if you take out the PCR testing. And it's partly, I think, because of the way they treat the PEI.

Yes, you've got to not only adjust for the PCR test. You've got to adjust for the PEIs and bulk bill incentives that go with those PCR items. And so if you look at Pathology Australia's number who do those sorts of calculations and just looked at tests, the growth was actually a negative number in the half, minus 1.5%. So our 1% is actually kind of above market, but we all know these numbers from Medicare are pretty volatile.

Absolutely.

Yes. No, that makes sense. Secondly, just wanted to ask on the -- it might again be clouded by the same thing. So I might just skip that. I was just going to ask about the PCR testing number and growth rate relative to the amount of testing. And I was just curious as to whether or not you had any capacity issues or staffing-related constraints that might have meant that you didn't grow, even though you did an extraordinary growth number, as much as what the testing numbers would suggest during the same period.

I'm not sure, Steve, can you just...

threw that out there of market for COVID, yes.

COVID, yes.

Yes. So -- and again, it depends which country you're in.

Just Australia.

Just Australia. So -- and there's a difference between the states here. In Melbourne, we did significantly above our market share and there's a number of reasons behind that. In New South Wales, I would say we were a bit below our share. And in Queensland, we're more or less at our share. So there are 3 states that did the COVID testing. The other states don't really come into this in terms of COVID testing. So -- and I mean, we can go into operational detail to give you the reasons for those. But overall, if you took the whole of Australia, I think we'd probably even out at close to our share. You see what did happen with COVID testing right around the world is that new players came into the market. People who have never done pathology or clinical pathology testing before took advantage of the situation and started offering COVID PCR testing. So they set up COVID PCR labs, when that was far away from the business that they were running beforehand. So that could have taken a bit of share from the regular lab players in every country. But nobody is really too worried about that.

Yes. No, fair enough. Final question for me. I just was going to ask about the genome sequencing that you're doing in Europe. And whether or not -- just any color that you're seeing with regards to the subvariant of Omicron. Any activity there that we should be mindful of?

Steve, this is not in the scope of today's presentation. We are doing excellent work in our German labs. Looking for new variants and sub classifying current variants, but I wouldn't like to comment on something as important as that. So I'm not trying to hide anything. I don't know the answer to the question. And I don't think it would be appropriate for us to give an answer, if you don't mind.

No problem.

Your next question comes from Mr. David Stanton, Jefferies.

Look, just in the U.S., how do you reconcile COVID test volumes that we can look at publicly, up about 2% versus yourselves, Quest and LabCorp reporting revenues down low 30s% over the same period in terms of COVID revenue.

I don't know the answer to that. Where did you get that number from that COVID testing is up 2%?

It's just that our world in data?

And it's the same periods?

Yes.

Is there a chance they're capturing rapid tests?

Yes, they might be including rapid antigen tests as well?

I don't think so. But that's okay. We can perhaps take that offline then.

It's probably a bit of Colin just referred to -- because we're seeing it in some of the acquisitions we're looking at, where you've got, for example, AP labs who have expanded into it. So it's -- I think there is an element of -- to create capacity, there's the normal market share that would have been in the existing labs has been spread across a few more players. I can't imagine it's got that significant of an effect.

But if you take Quest lab on Sonic, that's a big chunk of the PCR market. It's just -- it sounds like there's something not quite right...

Our share relative to what we see on Quest and LabCorp is about right. Yes.

Fair enough. There's -- no, I mean, I guess as a follow-up to that, and then I've got 1 more. There's a -- Quest and LabCorp did call out to some extent, the fact that they were over the 48 hours and therefore, got a lower reimbursement rate in some cases. Have you guys seen that at all?

No, we haven't really, David. You might recall that we received grants from the U.S. government last year that had us effectively quadruple our capacity in the U.K. So we have not been -- sorry, U.S. So we have not been capacity constrained and therefore, have not had issues. Obviously, there's always the anecdotal issue. And so I'm not saying we get the full amount 100% of the time, but it's very close to that.

Understood. And then perhaps you could talk to percentage margins on COVID testing going forward given what you've talked about in terms of February in terms of some volume cuts -- sorry, volume declines and price cuts that you've also talked to in the U.S., in Australia and in Germany. What should we be thinking? Should percentage margins on COVID testing be lower in the second half of '22 compared to first half '22?

I think the margins are going to be less of an issue than the volumes. So I mean, the margins will come down a little bit with a 15% fee cut as we've had here in Australia from the second half. But it's not a significant thing. It's -- much more significant will be the volume. So what we're seeing here in Australia is volumes that peaked in December, January are now dramatically off as you've read, what's happening in the U.S.. And in Germany, it's the opposite effect, it's gone up dramatically, and it's still at high levels right now. But the sense is that Germany is peaking or has just peaked in terms of COVID new cases, and therefore, the testing will follow that as well. So I think those will have an effect on our overall margins more than the actual individual test margins.

We probably do expect some more procurement benefit to come through to assist with that margin situation. Not all of the renegotiations that have occurred were a full year -- or sorry, a full period effect in the half.

Understood. And we usually get at this stage sort of a broad brush CapEx number for '22. Could you help us with that, please?

I think if you take the first half as an indication, you're going to be in a reasonable ballpark.

Your next question comes from Mr. David Bailey, Macquarie.

Just in relation to acquisitions, just noting the activation of the buybacks, it's likely there'll be some COVID-19 contribution earnings within potential targets and the multiples haven't really changed. Does this imply that sizable acquisitions like Unilabs could be longer dated and the M&A opportunities in the near term will be more bolt-on similar to the ones you've completed over the past half.

David, not really. So we will continue looking at acquisitions at all levels, small, medium and large. We have -- we remain -- first of all, that the buyback is up to $500 million. Secondly, the balance sheet is still extraordinarily strong. And thirdly, we have the opportunity to come to market in the event of a very big deal. You mentioned Unilabs. Well Unilabs has been sold now, but there might be others. And we would certainly be in the market for big acquisitions as much as medium and small ones.

And then just U.S. COVID-19 reimbursement. The public health emergency was extended to April. Do you have any expectations for what reimbursement could do once the public health emergency ceases, if and when it does.

So the fee that was set before the public health emergency was declared was USD 50 versus the USD 100 that's the current rate. But whether that's extended again or what happens is unclear at this point. But I think worst case, it would go back to that USD 50 level, but it may be something in between.

Your next question comes from Mr. Rod Sleath, Rimor Equity Research.

I just wanted to come back to the Harrison.ai deal. In particular, I just wanted to talk a little bit about anatomical pathology. So in -- my understanding is that diagnostic imaging has been able to take on the benefits of AI reasonably quickly as the algorithms become available and as they are given approval because of a long history of digitization in diagnostic imaging. But for anatomical pathology, I thought broadly, the libraries of pathology slides are not digitized. So I'm just wondering is there -- before the Harrison relationship can really start to work, is there a lot of work that Sonic has to do on digitizing the library so that there's enough data for Harrison to work with? And then just a follow-on to that is in your anatomical pathology operations around the world today, is digitization now a part of everything that you are doing?

Okay. I'll take the second bit first. There are many labs around the world that are moving towards digital diagnosis. And you can read about some of them. This has been a bit of a slow process because it requires an anatomical pathologist to move from reporting a very important disease or diagnosis under a microscope, where you have very, very high definition at multiple magnifications, to reporting on a screen. The screen technology has improved dramatically in the past years. And so more and more pathologists are becoming more and more comfortable with making a diagnosis off a screen as opposed to a microscope. And I predict that well into the future, it will probably all go towards diagnosing off a screen. In terms of your -- the first part of your question, it's a very relevant one because whilst we have -- we being Sonic Healthcare, have a massive amount of data in terms of material. So whatever cancer you might choose, whichever a body system you might choose, we are perhaps more than possibly any company, have a huge amount of material, but it has to be digitized as you say. So -- and broadly speaking, in order to go forward with an AI project, you need a digitized image of the tumor in question, for example. So part of the whole project is the digitization of sections of the material that we're going to be using. Again, this is not necessarily a huge problem given the scale of Sonic and the nature of our joint venture. So we are able to digitize large amounts of material in a fairly short space of time, and we don't see the digitization as being a bottleneck to the whole process. It's included because you are correct, we need to digitize a large amount of material in order to get an adequate cohort of cases to go forward with in order to label. So you take the digitized image and then label the pathology in question in order to go forward with your AI process. So we're already commenced with this, and we're probably doing this on a global basis. Some of our labs around the world are digitizing routinely and more than others. And we're in this stage at the moment in the world where anatomical pathology is beginning to make a transition from analog to digital, analog being the microscope. And so I think it's an interesting question you ask, but it's not going to hold up our progress. And you are correct in saying that radiology was, I guess, prearranged in a sense because there is -- a CT scan is already digitized. An MRI scan is digitized already. And so it's readily available. But given that we've already started the process, we don't think this is going to hold us up in anatomical pathology.

But it's worth also mentioning that this digitization process Colin is talking about, there's case studies to suggest that like digitization of lots of things, there's some efficiency gains that come from that. Some have suggested 10%, 20% just by being able to move cases around more efficiently, that sort of thing. So that's something that as well as say it, enables benefits -- as well as enabling AI, there are other benefits that should flow.

Absolutely. Can I ask a quick follow-on, which is directly related, which is really just on the clinical pathology side. I mean the benefits to patient welfare and efficiency from AI in diagnostic imaging and anatomical pathology is pretty clear, I think. And over time, we'll have material -- should have material benefits. In clinical pathology, it's sort of, I guess, what is already a pretty highly automated and efficient process, it's perhaps a little more difficult to see what the benefits potentially are. Do you see that -- and obviously, I'm talking about a long period of time, but do you see the potential for material benefits to clinical pathology in terms of patient outcomes and in terms of operational efficiency from the introduction of AI?

So you're correct in what you're saying, and that's why we have commenced with anatomical pathology, and that will be the focus for the near future going forward. We've left open the opportunity to identify useful areas in clinical pathology. So you're correct in saying that it is more a numbers game. The information... [Technical Difficulty]

[Operator Instructions] Mr. Rod Sleath is still on the line for you. Please go ahead.

Sorry. So I guess what we heard up to was you were highlighting that the focus will be on anatomical pathology initially, and we're going on to talk about, I think, what some of the potential benefits in clinical pathology could have been from artificial intelligence.

Yes. So I guess we're not going to be too detailed in this, but just to say that we've left open the opportunity to pursue AI in clinical pathology if we identify relevant areas. These might include things like microbiology, reading plates, cytogenetics. And there are a number of other areas that we don't want to go into too much detail, but we are going to be commencing with anatomical pathology, but we have identified areas in clinical pathology that could be worth pursuing.

There are no further questions at this time. I will now hand the conference back to Mr. Goldschmidt.

Thank you very much. And if anyone is still there, thank you very much for your attention today, and have a good day. Bye-bye.