Sonic Healthcare Limited (SHL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Sonic Healthcare Financial Year ended June 30, 2023 Finance Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to today's speaker, CEO, Dr. Colin Goldschmidt. Please go ahead.

Thank you very much, and good morning and good day to everyone on the call, how ever you've dialed in. It's a warm welcome to you to Sonic Healthcare's full year results presentation for the year ended 30th of June 2023. I'm joined today by 2 of my colleagues, Chris Wilks, CFO of Sonic Healthcare; and Paul Alexander, Deputy CFO of Sonic Healthcare. Before we go to the slide deck and as an introduction to the presentation today, I think it probably makes sense for me to say a few words about Sonic Healthcare, where we sit right now, perhaps just to position the company in relation to the result that we released today. The financial 2023 year was very much a transition year for Sonic. It was a year of moving away from what has been probably the most tumultuous 3 years in the company's history. And unlike most other companies, Sonic, as a health care company, found itself at the very center of the pandemic. We were called upon to deliver a huge and important new service. And so our activities actually increased during the pandemic. And we had to literally pivot at very short notice and turn up our engines to maximum speed in order to respond, and respond we certainly did. But instead of going through the gigantic efforts of our global staff to respond to the pandemic, I want to say that we have left that tumultuous period behind and find the company in a much stronger position and our people in a positive and upbeat mindset. With COVID revenues falling sharply through the year and especially in the second half, we have already initiated a program to accelerate the reduction in legacy COVID costs associated with the pandemic. Now these are mainly labor costs, and we'll give more detail as we present the results this morning. As a consequence of the pandemic, however, our balance sheet has strengthened considerably, giving us real firepower to acquire synergistic businesses. And 3 such acquisitions have been announced recently in the second half, and there are more in the pipeline. But at organic growth level, it's really pleasing that our base business growth has returned, and it's returned with some strength and with increasing momentum. As most of you know, our weighting is towards specialist referrals which is a result of our medical leadership model, which has been in place now for decades. And that weighting towards higher-end work is paying off because we see those referrals growing at a higher rate than others. As a result, the company is very involved in higher-end, higher-value services in both pathology and radiology. In pathology or laboratory medicine, it's in fields like genetics, high complexity anatomical pathology, the microbiome and in general, specialized more esoteric tests. And in radiology, it's in the higher-value examinations and modalities like CT, MRI and PET CT. So with the return of strong organic growth and with the return of M&A activity and with the range of activities to grow earnings and margins now locked in place, Sonic has come through the pandemic stronger than before and really in pretty good shape to grow into the future. So that's a few words, just as a positioning statement for today's presentation. And if I can take you to the deck now, we'll start on Slide 3, which hopefully you have in front of you as we speak. So this is our headline slide, and it shows our headline numbers. And the first thing that I would want to call out is just the strange comparative that we have this year between FY '23 and '22. And if I point you to the COVID revenue number, that puts it very starkly. So you can see in FY 2022, almost $2.5 billion of COVID revenue versus just shy of $0.5 billion in 2023, making the comparatives extreme in this particular year. But if you look at base business revenue, the growth is pleasingly 11%. And of that 11%, 7% is organic. And we'll come back to revenue in a later slide. The third bullet point there is just pointing out the momentum in our base business revenue growth. We've seen an acceleration between H1 and H2, and that is continuing into July. Earnings per share, we've compared to prepandemic levels, and it's up almost 20%. And in terms of cash generation, our conversion of EBITDA to gross operating cash flow was at a very nice 110%. The Board has declared and ratified a final dividend of AUD 0.62 per share, which is fully franked. And for the full year, our dividend is up 4% to $1.04. As I've mentioned, we've announced 3 synergistic European acquisitions during the second half with a total enterprise value of $890 million. And we are currently progressing other acquisitions and contract growth opportunities. Our future growth, as I mentioned, is now secured with a very strong balance sheet that will give us firepower in this particular space. Moving on to our guidance, and we haven't given guidance for 4 years now so it's a welcome back to the post-pandemic and more normal environment. We're giving guidance at EBITDA level of AUD 1.7 billion to AUD 1.8 billion. Now this equates to up to 5% growth on FY 2023 EBITDA. And this really is an indication of our base business offsetting the material reduction that we're facing in COVID-related earnings as we go from FY '23 to FY '24. Our interest expense will increase by approximately 25%, reflecting the recently announced acquisitions, and the tax rate will be between 25% and 27%. In terms of guidance considerations, as usual, our guidance assumes current currency exchange rates and interest rates and includes announced acquisitions only. And with those announced acquisitions, the majority of the synergies are going to flow post FY 2024. Our guidance does include the PAMA fee cuts, which we've spoken about before in the U.S.A., of approximately USD 10 million, although these cuts are not a certainty at all at this stage, and no other regulatory changes are assumed. If we can move on to the next slide, talking about our earnings growth. So as I mentioned before, and I think we've got to keep talking about this. We are transitioning at the moment from very high COVID testing volumes to an intense focus on base business, revenue and earnings growth. So our second half FY 2023 margins are clearly impacted by legacy COVID-related labor and infrastructure costs. And as I mentioned in my introduction, we have now set off a formal program to reduce those legacy COVID-related costs, which are mainly labor, and we do that in a humane way by natural attrition, which is the way we always do it in Sonic. And we're pretty confident that this program will be successful through the financial year. But in place, we have a whole range of drivers and initiatives, which are also locked in, which will feed to earnings growth and margins through FY 2024 and 2025. Perhaps the most important one of these is our strong base business organic growth and the momentum that we've got, and of course, the operating leverage that will come from outperformance in organic revenue growth. It's always been a strong feature of Sonic Healthcare going back many, many years. And we've seen this come back with some extra vigor in the post-pandemic period. So I've mentioned the post-COVID normalization of our workforce. The recently announced acquisition of Synlab Suisse gives us a real opportunity to integrate a sizable lab of CHF 100 million, so that's about AUD 160 million, into our existing infrastructure in Switzerland. And the benefits from this acquisition will flow progressively over the next few years. So there will also be revenue and earnings and synergies coming from the other recently announced acquisitions, that's the 2 in Germany, and one's prior, which are still flowing through into the FY 2024 result and beyond. We've also piloted a revenue enhancement product in our U.S. system with great success. And we're now rolling that out throughout the U.S., and there will be material upside coming from that. We have the benefit of indexation of our fees in a number of our markets, Radiology, U.K., Belgium and our primary care business here in Australia. We're undertaking rationalization of laboratory infrastructures in 2 locations, one in Hamburg where we will merge 3 labs into one location; and Munich, where we'll put 2 labs into one location, and there will be benefits flowing from both of those. And I'm going to be talking more about digital pathology and AI because this is a big ticket item coming down the pipe, which is right in our space and something we're really excited about. And of course, there will be ongoing procurement initiatives, which will also feed to savings. Of course, our future growth is going to be augmented by additional acquisitions and contracts, including those that are under consideration at the moment. It's really pleasing to say that M&A is back after a fairly quiet period through the pandemic. And of course, our strong balance sheet and our market position globally gives us a real strong position in this particular space. If we can move to the next slide, and you might be wondering why we've put the slide in -- so early in this presentation. But it really is to begin a discussion with the market with anyone interested in Sonic Healthcare to give you a sense of something that's really revolutionary that's coming our way in pathology. And AI, everyone knows about, digital pathology is something that is also something that will be hitting us in a big way very, very soon. So AI itself is going to apply to our Lab division and our Radiology division and will provide us with step changes in efficiency, quality and capacity of its own. But in the space of pathology or our anatomical pathology in particular, there is the revolution of digital pathology that is yet to come. So this means the digitization of specimens and a movement from analog glass slides and a microscope moving towards a digital world where cases will be examined on a screen in digital format. Now this has happened in radiology many years ago, but it hasn't happened yet in anatomical pathology. And the technology is now at a level where this is every bit as good as looking down a microscope. And somebody who is trained as a histopathologist even though I'm not doing it anymore, I can tell you that it's a very exciting change, and we look forward to it very, very much. In the case of Sonic, we are one of the world's largest anatomical pathology providers. Our revenue, just an estimate, is in excess of AUD 1 billion in that particular space. And we employ more than 1,000 anatomical pathologists around the world. This is huge. So you get an idea. This digitization is happening only in anatomical pathology. That's the change that's going to occur. And we, Sonic Healthcare, are big in anatomical pathology. And just to remind everyone what anatomical pathology is, it's the diagnosis of disease by the examination of tissue specimens and in particular, the diagnosis of cancer. 100% of cancers need to be diagnosed by anatomical pathology. And currently, and for many, many decades, it might even be 100 years, these diagnoses have been made by embedding a piece of tissue in a wax block, cutting very thin sections, staining those sections, and putting that under the microscope. And this will now change where we will scan the slide, digitize it and put it on a screen ready to be diagnosed digitally. So there is -- this is -- this has commenced already. Anatomical pathology is in the early stages of a revolutionary change to digitization. And we are at the forefront of this. We are very invested and involved in the process and hopefully, will lead the market in this space. Just to go on, Franklin.ai, our joint venture in Pathology, is in the AI space. So you've got to separate digital pathology and AI. You need digitization to get to AI. But our joint venture with Franklin has been hugely successful to date. I've mentioned before that the enormous synergy that exists in this partnership where Sonic Healthcare is providing deep, deep experience in anatomical pathology, and Franklin is providing deep experience and technology in the AI space, and you put those together and it's amazing synergy, quite frankly. We're nearing completion of our first anatomical pathology AI product, and the validation studies are set to begin in early calendar 2024. And just to remind everyone that the products coming out of Franklin are not only to be used internally, but we plan to sell these products globally. We also have an investment in Harrison.ai, and please accept apologies for all the names. And Harrison.ai has a radiology AI product through its Annalise.ai company. That chest X-ray product is now deployed throughout Sonic's radiology branches. And the second product, which is a CT brain AI application, is now in final evaluation within Sonic, and we hope that, that will be utilized not just within Sonic, but globally soon, too. Moving on to the next slide. I've mentioned the final dividend of $0.62, which is up 3% on last year's final dividend, bringing total dividends for the year to $1.04, which is up 4% on last year. There's 100% franking of the final dividend record date 7th of September, payment date 21 September. And of course, this maintains our progressive dividend strategy. The chart on your right is updated. We have shown it before. And it now includes a full 30 years of Sonic Healthcare dividend payments, full year dividend payments. Going back to 1994, when the maiden dividend of $0.02 per share was paid, we're now at $1.04. It's a record that Sonic Board and everyone in Sonic is pretty proud of, and we certainly hope to maintain this progressive dividend record into the future. Moving on to capital management. You'll see in the table that our net debt has increased slightly $74 million. That does include foreign exchange movements of $43 million. Our on-market share buyback of $425 million is now completed and closed. And as at 30th of June, we had headroom of AUD 2.1 billion, but that was before the final dividend was paid and before expenditure on the announced acquisitions. You'll see from the chart on your right that our debt cover is still extremely low, less than 1. You'll see that our gearing ratio in the table is less than 10%, and interest cover is at a pretty very healthy, almost 30x level. So this is really to show what I mentioned earlier that there's a lot of firepower in this balance sheet for further growth. Next slide is on revenue. And if I could take you to the chart on the left to start with, which gives you a snapshot of the last 5 years in terms of base business revenue and COVID revenue. The COVID revenue in the red or series of pink, whatever color you're seeing there, gives you an idea of what's happened through the pandemic, starting off with $400 million of COVID revenue in FY 2020. So remember that goes to June 30, 2020. The pandemic kicked off about February 2020. And then ramping up to $2.4 billion in FY 2022, and then coming down to $0.5 billion in FY 2023. And we'll talk a bit further about COVID revenue. But then moving to base business revenue, our total base business revenue, including M&A and FX, is 11%, but organic base business revenue is up 7%, as mentioned earlier. So that's the $7.7 billion over the $7.2 billion. If you look at our base business revenue over prepandemic levels, it's up 13%. And I've mentioned that more and more, we are being driven -- we're more weighted towards specialists and hospital referrals, which are higher value and are growing stronger than other referrers at the moment. So the strong organic growth is continuing through to July, which was up 8%. And then just looking at the chart on the right, which splits COVID revenue by month in FY 2023 and July, which is FY 2024, you'll get a look -- get an idea here of the dramatic fall that's occurred through the FY '23 year in COVID revenue. And this goes to the subject of our COVID costs and COVID labor that really needed to still be in place. I don't think anyone was expecting this rapid decline in COVID revenue. It's good news in general, and we're very happy to take it. But we had to keep in place instruments, people and, in some case, drive-through centers, infrastructure for COVID, which we are now rapidly dismantling. So you can see that in July, we're down to roughly $10 million of COVID revenue. And I don't want to be the one to predict where it's going to go here to from. But it's going to continue to be low. I think we're all going to agree with that. And in a very short space of time, COVID testing will become part of our base business where it's included into respiratory panels that we test for other respiratory viruses as well. So I think this is an important chart in at least describing where Sonic has moved through the financial year to -- from a position where we were still doing quite a bit of COVID testing to where we are now where it's almost disappeared. And there's a short lag that follows this in terms of removing legacy COVID costs, and that's where we're at, at the moment. The next slide shows our normal split of revenue. And again, it shows what it has shown before. I've actually compared this to last year. And I've compared this to prepandemic. And the interesting thing is that whilst the absolute dollar numbers obviously change with Sonic's growth, the split and the percentages have stayed fairly consistent, which means that we're experiencing consistent growth in all our divisions, roughly in line with each other, which is really good news. So we have in this chart 3 really large divisions and two, that's U.S., Australia and Germany in the medical laboratory space, pathology space; and 2 medium to large entities, that's U.K., Switzerland, and also Radiology outside of the lab segment. We're going to run through the country slides quite quickly. First, the U.S.A., where we experienced base business organic growth of 4% at an operational level. Our teams in the U.S. have done a great job to keep the workforce maintained at below prepandemic levels. I want to call out on this presentation as we have before, our exclusively licensed thyroid cancer genetic test, Thyroseq, which continues to be a real star performer with revenues now approaching run rate of AUD 100 million per annum. It's incredible. That's one test that's bigger than small labs and even medium-sized labs. And we expect that revenue to continue -- the revenue growth to continue well and truly into the next several years. I mentioned that we've piloted an enhanced revenue collection system. We're rolling that out at speed. And there will be material upside that comes from this product into future years. And I've mentioned the PAMA fee cuts, which are in our guidance, but they have been deferred ostensibly to the beginning of next year, but there is legislation that's the SALSA legislation that's Saving Access to Laboratory Services Act, which is there in Congress, and hopefully, we'll be successful to delay or reduce those cuts that are pending. Moving to our Australian Pathology division. Base business organic growth was strong at 11% through the year, especially from the high-end specialists, anatomical pathology, genetic testing, esoteric testing, et cetera. At operational level, Sonic in Australia was selected as the only private lab to participate in a very meaningful and important way in the PrOSPeCT trial, which is a landmark trial for national cancer genomics. So this is profiling of cancers, which will then be handed to pharma companies for clinical trials and new cancer therapies. We've partnered with Microba, as previously announced. And we are working on some incredible products with Microba in a very synergistic partnership, one of which is called the MetaPanel, which we believe is a world-first product, which includes a comprehensive test for rare gut pathogens. So this is in addition to Microba's microbiome testing where you're testing for normal organisms in the bowel. This is a separate and very important product that is about to be released. We're also nearing the completion of Stage 2 of the Sullivan Nicolaides laboratory building in Brisbane. This is an $80 million project, which was foreshadowed when we built the lab some 5 years ago. And we hope that it will complete early next year. And it will support future growth and efficiencies. Moving through to Germany. Our base business growth, a very healthy 10%. And again, strong growth from specialists driving anatomical pathology, genetic testing, molecular testing, high-end testing in general. We've completed 2 regional laboratory mergers and 2 further ones are planned in Hamburg and Munich, as I've already mentioned. We've also commissioned a new Biovis lab. Biovis is based in Limburg, Germany. It is the market leader in microbiome testing in Europe. And we also continue to do very well with our exclusive Oncotype DX breast cancer genetic testing. We are the only lab in Germany and Europe doing this test, and growth is very healthy in that particular test. Just talking a little bit more about the German acquisitions. Firstly, the diagnostic and laboratory group, and these have been announced previously. And so -- and if you look at the map, these are represented in red dots on the map. This business has revenues of about EUR 65 million. That's over AUD 100 million. And gives us a very highly complementary footprint with a series of labs across Eastern Germany. This is a very respected lab, giving us access to locations where we do not currently operate and also opportunities for synergies with our existing operations. And then Medical Laboratories Duesseldorf, annual revenue is about EUR 50 million per annum, AUD 84 million. Both of these deals will close in Q2 FY 2024. MLD is a leading and very high-quality lab based in Duesseldorf. Duesseldorf is in the state of North Rhine-Westphalia. And that is Germany's most populous state. I think the population is around 18 million. It's almost one Australia in one state. So we see a lot of growth ahead for this lab in that very populous area. And just to call out that there are further acquisitions coming down the pike in Germany. Moving on to U.K. Base business organic revenue growth is 6%, but important to note that this is on top of 24% base business growth in the prior year. Incredible performance of our U.K. division. And this growth is coming from both our private work and our NHS work partnerships with NHS Trust. We've mentioned several times before, the sizable NHS contract Hertfordshire and West Essex. Taking a bit longer than we thought to close, but it is now in final governance process. And in the meanwhile, we've been awarded preferred bidder status in another NHS Trust partnership with the Whittington Health NHS Trust, and that will be for a minimum of 5 years. And there are more NHS partnership deals to come. Moving on to Switzerland. Where, on the face of it, base revenue growth of 1% doesn't look all that healthy, but bear in mind, there was a fee cut almost at the beginning of the financial year of 7%. And so you really have to look at that 1% in light of the 7% cut, and meaning that, that's very strong organic growth, including market share gains, completely offsetting the impact of that fee cut. Switzerland is another market where we lead the market and we are very strong with specialists and high-end referrals, as I've mentioned, for other countries. We have a big plan set now for Synlab Suisse. And if you go to the next slide, where we show a map of our laboratories and the Synlab Suisse labs, you'll get an idea that this is a very complementary acquisition for us. Now Synlab Suisse's revenues are roughly CHF 100 million per annum. That's about AUD 175 million per annum. So it's a big business. And it is currently at breakeven level. Now we've made this acquisition with full knowledge of this. But you'll see from this map that this is right in Sonic's wheelhouse where we can provide a home for this big business and all the labs and all the staff, but at the same time, work in tandem to improve the profitability of this company in the years ahead. Importantly, if you look at the map again, Synlab Suisse covers the whole of Switzerland. That's all 3 language regions. But very importantly, it gives us access to the Italian-speaking area, or Ticino area of Switzerland, which is on the right-hand side of this chart, where we currently do not operate. There is potential for further acquisition in Switzerland. Moving on to Belgium. Base business organic growth was a healthy 12%. There was fee indexation from 1 January 2023, of 6%. and our lab in Antwerp has now completely refreshed its workflow and automation and is operating very well under the new system. Moving to Radiology. Revenue growth was 13%, with organic revenue growth of 11%, earnings growth of 20% and margin expansion of 150 basis points. Our Radiology division is performing outstandingly. And there's a combination of factors behind this: Improved same-site revenues underpinned by brownfields expansions where we install MRI, CT and PET CT. There's a focus on cost control. We've got new MRI and Medicare-funded MRI licenses. And our expansion into Melbourne and Victoria has been successful. So there's a number of factors. And we expect our Radiology division to continue its stellar performance into the future. Moving on to our primary care division, Sonic Clinical Services. Revenue there was down 10%, and that's mainly because of the cessation of pandemic services, and those were mainly vaccination services. We're seeing revenue improvement in -- we saw revenue improvement in the second half due to increasing doctor hours and also the move towards more private billing by GPs. And obviously, the decline in earnings has come with the lower revenue. The outlook is more positive for FY 2024 as private billing increases and also with government funding increases which were announced in the May budget. So there will be indexation of general practice from 1 July 2023. And those targeted fee increases from 1 November, which -- for the Australian audience on this call, that's a tripling of the bulk bill incentive for pensioners and under 16-year-olds. And that change will be material for Sonic Clinical Services. We've also announced our Defense Contract win for prerecruitment medical. That has now commenced on 1 July of this year, and that will add revenue of approximately AUD 30 million per annum. The next slide, just as an update on our ESG and sustainability progress, which has been very substantial. Just a quick comment that sustainability is a global project within Sonic, and it's a huge project being coordinated and led out of our global office here in Sydney. There's information there about progress on our key short-term goals. And also pleasingly, just to give you an update on how we're being viewed by independent ESG rating agencies, our ratings are improving, as shown in those boxes there. Going on to the final slide. And just to summarize the picture that I've presented this morning, A key feature of Sonic at the moment is strong organic base business revenue growth, which is gaining momentum. Our organic revenue growth is enhanced by our market strength, particularly in the specialist and hospital market segments and also augmented by our exclusive rights to particular diagnostic tests like Thyroseq, Oncotype DX, Microba, which I've mentioned. We have earnings growth initiatives in train, which will feed to margins. As I've mentioned, we're investing heavily in automation, IT, digital pathology and AI, all of which will drive growth efficiencies and margins. And on the M&A front, the future looks really bright in terms of integration of existing acquisitions and new acquisitions in our pipeline. And I want to end by mentioning our 41,000 global staff. I think we're extremely fortunate to have culturally united staff under Sonic's medical leadership model. We do see Sonic as being a different company, and we actually referred to medical leadership and our core values as the Sonic difference. And I think we're extremely fortunate to have strong, stable and experienced managers, pathologists and radiologists throughout our global footprint. And when you add our staff to this, I want to take the opportunity right here to say huge, big congratulations, and thank you to all our staff for their participation in Sonic's progress and particularly in the results that we've released today. So thank you for the presentation, and I'll hand you back to our moderator, where we can start with your questions. Thank you.

[Operator Instructions] Our first question is going to come from the line of Chris Cooper with Goldman Sachs.

You mentioned that the currency translation risk is increasing. Can you just confirm on that EBITDA guidance, what currency payers you've struck that at, please?

I'll give this one to Chris.

That's Chris. Is it -- Chris Cooper, is that right?

Correct, yes.

Yes. Chris, we've used -- I think we mentioned actually in the guidance slide, I think, that we have used current rates. So I guess that's the best guidance we've got...

I just want to confirm what the current rate is just because we've seen a bit of weakness in the Aussie dollar since the start of the fiscal...

I actually don't have them just from the last couple of weeks. So it probably reflects that change at all.

Fine. And just on the comments around the sort of post-COVID normalization of the workforce. I mean, I know this is something you've been working on for at least a year, and it surprised me a little that you were sort of calling out that there was still a lot of costs related to labor and infrastructure still in that second half. Could you just give us an update there on sort of the progress and how much more cost is yet to come out from specifically COVID, please?

So short of giving you actual numbers, it's -- as I've described in relation to the chart showing the falloff in COVID testing and COVID revenues, it's -- we -- there's a lag phase in dismantling the infrastructure in place there. So I can't give an actual number, but it's a significant program. It's been in train, not for a year but for less than a year. And it's ongoing and will be material once completed.

Okay. And just one final one, if you don't mind, just on the average fee. I mean, obviously, average fee is going to be declining here on lower COVID volumes, but I'm more interested if you could sort of segregate for us how that average fee is looking just on the base business just as the organic sort of volumes continue to tick up?

Yes. So this is going to vary by country and vary between our Lab divisions and Radiology. In general, with the increasing growth in specialist and hospital referrals, so our average fee does go up. Obviously, it's come off from the COVID years. But if you just take base business, we have a history of average fee growth over a long period of time. And so there's a couple of things there. It's higher end testing, and it's also what we call enrichment where and -- in some cases, there are more tests being ordered per patient. Because when we talk about average fee just for everyone else, we're talking about a fee per patient, whether you have 1 test or 10 tests and whichever radiology examination you have. So -- and when I say it varies by country, Australia has this peculiar thing called coning where a referral from a GP only 3 tests are paid for. That doesn't apply in other countries, but it's very significant here in Australia. So the more nonconed work you have, the better off you are in terms of average fee. And this is the importance of being in -- being more dominant in the specialist and hospital space, which doesn't have coning applied to it.

Our next question is going to come from the line of Steve Wheen with Jarden.

Just wanted to ask about the margins, the EBITDA margins. When you gave your commentary around the interim result, you indicated the base business was back to -- what has happened to the base business?

You're cutting out, Steve. Hello. Is the moderator there?

Hello?

Yes, you cut out. We didn't hear the question.

Okay. Sorry. I'll start again. Just a question on the...

No, you're cutting out, Steve. Are you on a strange line? Hello. Hi. Is the moderator there?

I'm -- we can move to our next question, just a moment. And the next question is going to come from the line of David Stanton with Jefferies.

I better start by asking, can you hear me okay?

Yes, all good.

Look, just 2 for me. Firstly, just perhaps for Chris. Just looking at potential for depreciation number for 2024. Should we expect that to sort of be flat or slightly increase given you've -- given your CapEx profile in the previous couple of years? Any help on that would be greatly appreciated.

Yes, David, the CapEx has been a bit higher in the last few years, largely as a consequence of the building program that Colin touched on with the program up in Queensland and in Germany. Like in '23, we spent about $160 million on buildings. So whilst that's a chunky CapEx, the depreciation on that is pretty low, generally at 4%, I think. So there will be some knock-on effect, but I think the base depreciation gets to be confused now with AASB 16, but is around about -- for '23 about $260 million. So you'd expect some of that to -- that would increase a bit with that CapEx. So, I guess, you can do your own numbers. There's going to be a little more because we still got the tail of some of those building projects, particularly in Munich and in Brisbane. I think the estimate is probably about $100 million, something like that, $90 million to $100 million in the FY '24 year, and then those projects in CapEx here on those projects, and then that will be -- those will be finished, and there's no others right now that we're expecting in the next year or 2.

David, it's Paul here. Of course, there will also be some additional depreciation related to the acquisitions that we've announced.

Sure. So could you give us then a sort of a broad brush number for CapEx for '24 as a follow-up?

We know that number, obviously, but we haven't disclosed it, but you should be allowing for that $100 million -- $90 million to $100 million for buildings, you should assume it's probably reasonably in line with depreciation plus kind of 10% is kind of the rule of thumb we've used historically.

Okay. And then final question from me. Just in the guidance number that you've given of that $1.7 billion to $1.8 billion of EBITDA, are you able to sort of call out, at least approximately what the acquisition contribution might be?

Look, we haven't disclosed that, but what we have disclosed is that the German businesses are not going to settle until the fourth quarter. We're hoping it will be early in that fourth quarter. It's a little dependent on some regulatory things that you need to go through in Germany. The Suisse business we settled, which we also mentioned on the 3rd of July. So we've got that for the full year. But that, we've mentioned, is coming from a kind of 0 base. So I think over 2 or 3 years, we're expecting some strong synergies from that acquisition, but I wouldn't put a huge -- there's not a huge number in there for the guidance that we have given. So just probably a little bit at the back end of '24.

Our next question comes from the line of David Bailey with Macquarie.

Colin, Chris and Paul, just following on from Dave's question around '24. Maybe just can you just give us a bit of a sense as to what you're thinking around base revenue growth versus COVID expectations? And then as a follow-up, just in Australia, just your observations around specialists versus GP trends, and what your expectations are for those particular channels going into fiscal '24 as well, please?

So, David, in terms of COVID revenue, as I mentioned earlier, it's impossible to predict July's numbers at $5 million for the month coming off a steep decline. It could go -- it could stay at $5 million. It's going to be something in that order and even less through the year. And then all the rest of the growth at base business organic level will come from our referrals. And yes, so the question about specialist referrals versus GP referrals really has to be seen in the light of a very long-term play. Sonic's medical leadership model right from the outset was a model based on the employment of pathologists and the development of higher-end technical expertise, which then attracts specialists and allows you to deliver services to hospitals. So a lower end complexity lab just couldn't do that. So you have to have, in particular, for anatomical pathology expertise in pathologists, pathologists who are specialized in selected systems. So uropathologists, gynecological pathologists, GIT pathologists, et cetera. And by doing that over a long period of time, you begin to attract clinical specialists. So this has been playing out. You cannot do this overnight. It's 10, 20, even more years in the making. And because of our medical leadership model, this has been replicated overseas as well. So when you look at Germany and you look at Switzerland and even if you look at the U.K., we are providing -- and the U.S., we are providing top-end lab services. And that attracts the specialists and hospitals. And that feeds to higher average fees, and it feeds to higher value tests in general. And in Australia, it feeds away from this thing called coning. And in general, gives a much healthier financial outcome. I should just say that if you attract specialists because you're an expert in anatomical pathology, you will also get the referrals of blood work and non tissue, non-cancer specimens as well. So there's many elements to your question, which maybe we can take offline at some other point so that we don't bore everyone.

Maybe just to be -- just pointing back to the first question then, what sort of organic revenue growth you're assuming for fiscal '24?

We haven't guided to revenue growth, so we can't really give you a number. We've obviously given you the rate in July and talked about the momentum. So probably leave it at that.

Next question is going to come from the line of Craig Wong-Pan with Royal Bank of Canada.

Just on that July organic revenue growth of 8%, is that sort of fairly similar across the different markets? Or is there any markets that are kind of performing stronger than that?

If you look at the different growth rates we gave in FY '23 for the market, July is reasonably reflective of that as well. So there is some differential between the different markets.

And then just with the enhanced revenue collection system being piloted in the U.S., just trying to understand, is this like a new different offering? Or is this sort of similar to what other competitors are doing in that market?

Yes, Craig, it's Chris here. Look, it is an off-the-shelf product that -- one that's been built just for labs. We have, in the U.S. -- we've grown over a period of time had reasonable systems, but they were kind of legacy systems. And so we've been trialing this for a little while. And what essentially it does because it's such a complex receivables collection method in the -- like every single claim, which might be $60, you have to get -- it's like making an insurance claim for your car here in Australia where you've got to give a certain amount of information. If you haven't got all the details, the claim gets denied. And you can keep trying to get the details. But what this new technology does is it uses tech to clean up the claims and so you don't get as many denials and you don't write as much off. So it's really just -- it ultimately gives us a better outcome in terms of how much cash we collect and how much revenue we generate from the work we've been always doing. So certainly, the results we've had from 2 smaller rollouts has been probably even better than we expected. So it's -- we put it in there because it is quite material because it potentially gives you just a chunk of extra revenue that goes straight on the top and bottom line. And it's in -- you could assume it's in the mid- to high single kind of digits that sort of is what we might be expecting.

Okay. That's helpful. And then my last question, just on the digitization of pathology. I was wondering if there's any kind of cost or CapEx required to sort of set all that up.

Sorry. Say that again, I just missed the start of that question.

The digitization of pathology, like, I was wondering whether you need to spend much on kind of cost or CapEx?

There is a bit of CapEx, and maybe I'll hand over to Colin, but there's -- I guess, the extra step is the scanning step. So there's a -- and that's where the technology has now got to a point where the resolution on that scanning is good enough that pathologists can feel comfortable looking at a screen and the resolution on screen as well got better as everyone kind of knows. But -- so yes, that's in the scheme of things and the potential benefits to flow. The cost of those scan has come down a bit like computers come down in price. So it's not hugely material compared with the benefits that would flow. So the payback on that sort of gear would be very quick. But maybe, Colin, do you want to...

You've said it all. That's good. If there's a question on CapEx.

Our next question is going to come from the line of David Low with JPMorgan.

Could we go back to Dave Bailey's question. I mean just the trend in specialist referrals seems to have been quite strong. And as you've said, Colin, Sonic is very well positioned to win that work. But why? Why did it happen? And is it going to continue? Or do you think we'll see a reversion to some degree back to previous trends?

So there are 2 elements this, David. One, you've got to consider this question in light of GP markets right around the world, but very much in Australia is a good example. GP consultation hours have fallen dramatically. And this is an issue in Europe, it's an issue in the U.S. as well in addition to Australia. So the absolute referrals coming from GPs are down on a relative basis compared to specialists. We -- so that's part one of the answer. The part 2 is that where I've been talking previously. It really does depend on a lab's reputation and expertise. And we don't see this slowing at all. So we don't have 100% of the specialist market in Australia. We do think we are dominant in that market if it -- you have to actually count volume or dollars coming from that segment of the market. Sonic is very strong in every state in Australia. And if you look at Germany and Switzerland, it's the same. But -- so we believe that will continue because we have spent money on pathologists, on labs, on equipment, on technology. There's a whole range of things that go into our medical leadership model, which gets us to the position we're in today. And I think the benefits are going to keep flowing for many years to come, if not decades in this particular area, specialist referrals.

I think we can add that we have done some analysis that shows that our share of the market has steadily grown, which comes back to your point about if you provide great service, you do win market share, and that's been evidenced by the numbers, whereas the market tends to be defined for whatever reason because it's easy to measure by collection centers, but collection centers are irrelevant with this part of the market. So this is -- I think it's worth pointing out that the market share is very different from collection center numbers.

Yes. No, no, look, I think I get most of that. What I'm interested to understand is, has there been an uplift in specialist referrals post pandemic? And therefore, is there a risk that maybe that normalizes and this solid improvement that [indiscernible] as the dominant player and the average price benefit that [indiscernible] starts to fade, and we see a bit of a reversion to the norm. I just wonder whether that's a risk.

Okay. So on that particular point, we haven't seen a post-pandemic spike other than in selected subsegments here in Australia. So surgery for cancer went up in H2 FY 2023. But that's -- whilst it was important in terms of our labs here in Australia, it's not material in the whole of Sonic's numbers. So yes, there was a -- maybe it's a catch-up, I don't know how you want to describe it. But it did occur, and it's waned already. So it was fairly short term. I think this was surgeons catching up on elective procedures and even nonelective procedures, quite frankly. But we didn't tend to see that elsewhere in the world. So I don't think this is something that was sort of a flash in the pan and going to disappear. No, because the much more important element is the very long-term increasing our specialist market share and all the benefits that go with that.

All right. I might just change topics, if I could. Some of the other German lab groups have talked about pressure from the lack of funding increase. I was just wondering whether Sonic's expecting anything on that front. And then if I could just squeeze another one in. Chris, your comments then on the receivables package and the mid- to high single-digit benefit. Can we understand -- that sounds enormous, am I applying it to the whole business? Or this is going to be rolled out over 5 years. When do we see that benefit, please?

Yes. Look, it will be rolled out over -- we're hoping that the last major rollout will be happening kind of at the back end of this current financial year, the '24 financial year. Yes, this is -- and it's just the U.S. and it's probably not as significant an impact because on the IP part, we use a different software in IP, and it's probably not the same sort of upside on that. So it's mainly to do with the clinical side of our business, which of the $1.4 billion, there is a bit over $1 billion, something like that.

Okay. But to clarify what you said, Chris, I mean, look, the mid-single-digit improvements coming through in margins? I mean, I'm just trying to understand how significant are we talking about in dollars? Because what you're saying implies an enormous uplift unless I'm misunderstanding.

It is a fairly significant uplift. That's why we mentioned it. And it's a weird thing because it's just getting paid. What you should -- what is the work you've being done. So it's no extra work. It's just making sure we don't end up writing off more because we can't -- we don't have all the details we need to be able to collect it. And because it's only $70 at some point in time, you make a few attempts to get it, and then you write it off. This technology makes that a whole lot more straightforward, streamlined, simpler. There's even a little bit of a benefit on the staffing side as well as the extra revenue. So it's something that's quite exciting in terms of our business in the U.S.

Okay. But it comes this year and it's in the guidance? Is that the right way to think about it?

A little bit of it is in this year, more of it comes in '25 and -- because it's the rollout. And our largest business, the rollout is only scheduled for later in this financial year. So putting more of it -- a little bit in '24, more of it -- all of it, hopefully -- or close to all of it, would be in '25.

Right. And just quickly on Germany and then I'll get off.

Sorry, I forgot what your question on Germany was.

The competitors are talking about plenty of pressure from funding in Germany because they're not making any money, and therefore, funding needs to be reformed. Any activity or any expectation from Sonic on that, please?

Yes, look, I think we're -- like our numbers or our forecast is assuming there's no increase. But you're right, there's -- some of our competitors there who have been struggling. And so we can understand them perhaps trying to put pressure on the fee levels. If that happens, then that would be upside. I'm not aware of anything in particular. I don't think any of us are aware of anything in particular. But that would be a bonus if it was to happen.

Our next question is going to come from the line of Sean Laaman with Morgan Stanley.

Colin, Chris, and Paul, still on the mix. I remember back at the German site visit, I think the commentary at the time was that there was a 5% revenue growth and 5% volume growth. And I think one of the business heads made the comment that let's just say, we'll be happy if some of the lower-end cholesterol testing doesn't come back. I'm wondering if, first question, if you've seen that lower-end cholesterol testing come back as it were.

So Sean, I would not be able to answer that very specific question related to Germany. But I think in general, what we have found in Germany is that they're -- on a relative basis, the lower complexity tests have reduced and the higher complexity tests have increased, and that has the effect of raising average fee. Whether that's because of the GP issue that I mentioned earlier or due to something else, I don't know. But it's not a negative for our business. So I've had several of our managers in Germany say that this is actually a good thing if some of the less complex tests are slightly lower and the higher complexity tests are slightly higher. So -- but I'm not aware of cholesterol in particular, falling in testing numbers anywhere in the world.

Sure. I mean just using that phrase as a grab basket [indiscernible] at a lower rate.

What we are seeing, Sean, is strong growth in higher complexity areas like the Oncotype DX test that Colin spoke to before, like microbiome testing as well that our Biovis business has been growing very strongly. So the growth in those particular tests is driving average fee growth as well.

I think, Sean, what you might have been referring to is during COVID, perhaps people weren't going to get the normal screening things done because they were keeping away from doctors and all that sort of stuff. And I guess we're...

That would contribute.

Sort of getting beyond that now where things are getting more back to normal.

Sure, sure. And next question, kind of related to [ mix ]. So doing very well with Thyroseq and Oncotype DX. And I imagine part of that is your medical leadership, but also the broad scale of your business, which is probably an attractive fact for innovators of IP of these tests. So is this something that's going to be an ongoing opportunity for more Thyroseq type tests in the future?

Absolutely. So this is a benefit that we can't actually speak definitively about, but because of our position, our reputation, our medical leadership, all of that you've said it yourself puts us in a position to be prime candidates to get exclusive rights to these tests, if not to develop them ourselves. So a good example is with Microba, where we have co-developed the MetaPanel test, which I think will be a brilliant success going forward. We'll wait and see after its launch. That's a good example. We can add value to partners in this space. So if you take a Microba, if you take a -- you can -- the Thyroseq is another example where we add value to the innovators and originators of these tests because of our expertise, because of medical leadership. So this is, I think, something that is going to happen increasingly into the future. And the whole area of these very specialized tests is going to mushroom soon. Particularly when you get to personalize medicine in terms of cancer treatment, there's going to be a whole lot of testing required, which will be very specific. The PrOSPeCT contract is another example where Sonic has been awarded that contract. Not everyone can do the testing that's being asked there. And Sonic's 2 genetic labs in Australia can do the testing. So we are the only private lab doing -- we'll be doing half of 20,000 genetic tests on cancers, so 10,000, with the remainder being done in highly specialized public labs. So this is a very important area for us going forward. And I think Thyroseq gives an indication of how big it can get from one test. It's incredible.

And one more, if I can. It seems with most companies these days, you mentioned AI, and it earns you a couple of [ PE ] points. But based on that, with respect to the Chest x-ray and Annalise, in market, what's the feedback? Is this just something that's nice to use? Is it -- you're seeing genuine efficiencies and synergies generated from this? There any commentary you can provide? Or is it just too early?

Yes. So by the way, a couple of points, multiple. I think you said we're not -- that's not what we're chasing. But this is an important area in our space. In the case of chest X-ray, the tool that's offered from Annalise is an assistant to the radiologist. So there's no intention to ever replace a radiologist or a pathologist, but it's a very useful aid to verify and to assist the radiologist in making the diagnosis. In the case of the chest x-ray, which is generally a fairly rapidly completed diagnosis, the efficiency gains would not be huge, as you might imagine. If you then move on to Brain CT, which takes a bit longer and where an assistant will perhaps be of more value, then efficiency gains are going to increase further. And then if I switch to a pathology AI tool, and let's say you've got an assistant for prostate cancer, which is a complex histopathological diagnosis, the synergy gains and the efficiency gains will be very significant. So -- and moving right across the spectrum of radiology and pathology, I think you're going to find a huge gain in efficiency when this is done and dusted. And it's a revolution happening in both disciplines.

Our next question comes from the line of Laura Sutcliffe with UBS.

Just a follow-up on the AI digitization piece to start with. Do you think that all of the markets you're active in can go down the pathway towards digitization and anatomical pathology at the same speed? Or is some more amenable to that than others?

Yes. So that's a fabulous question because what we are planning to do is to roll it out sequentially, not simultaneously right around the world. There is some digital pathology being practiced in all our countries at the moment. But in a sort of nonuniform large-scale way. So our first port of call is probably going to be our U.S. market where we are strong in anatomical pathology following the Aurora acquisition and ProPath. And we are hatching a plan to standardize that rollout. The question why it's important is that it needs to be a national program because the beauty of digital pathology where you digitize and have a central repository of cases rather than having them in many labs with glass slides and stuff like that, is the ability to nationalize a whole subdiscipline. So you can take, for example, skin pathology, which is probably our biggest referral in anatomical pathology and have a product for digital pathology of skin pathology and then make it national, where all our dermatopathologists, the skin pathologists, can participate together, which adds expertise into a team and makes it a whole lot more efficient. So we'll start off in the U.S. and then progressively roll it out elsewhere. There's an issue about enthusiasm and reluctance. It's the way of the future. There's absolutely no doubt. This will definitely, definitely happen. The young pathologists are very keen. Some of the older pathologists might be more wedded to their microscopes. But that doesn't matter because even if not 100% of our anatomical pathologists take on digital pathology, it won't really matter. We don't have to go all or none. But I think the majority of pathologists, now that the technology is so superior to what it was in the past, will embrace the strategy and prefer it. It's much easier. It's more efficient. And the resolution on the screen is brilliant, and it's just the whole workflow and logistics of a pathologist are much easier. And so I'm optimistic that the rollout is going to be quite successful. And you need to stay tuned because this is a space where we hope to be making future announcements. This is right in our space, and we're very excited about it.

It also enables AI. You can't have the AI without the digitization. So one's got to come before the other.

Yes.

That's helpful. And then maybe just one more. Thinking about your M&A strategy. You've obviously mentioned some things in the pipeline in Germany. But just in general, what characteristics do you generally need such that something would fit within your ROIC criteria? Is it mainly always geographic adjacency? Or are there other things that sort of get things to screen favorably?

Yes. So I mean we -- historically, it is -- so the geography is quite important. But things are changing. For example, digital pathology is a good one where geography won't matter. We look at culture as well. We look at the reputation of the lab. We look at the potential to grow the lab. So we want to be sure that there's some integration benefit and synergies. So geography is important in terms of physical integrations, but we can add benefits even without that, for example, in procurement is an obvious example, but also IT. And there's a range of other areas where we can enhance our business. A good example is going to be the Synlab Suisse acquisition in Switzerland, where, yes, the geography is good, but we'll add much more than physical integrations into that operation, and I'm very confident that we'll turn a 0 margin business into something very profitable in the next year or 2. So -- and then you can extend this question into do we look at new countries because some people ask us that question. And there, we have a different range of factors. At the moment, we're not really considering new countries. And we would want to be sure that a new country was suitable from a number of angles. So if we look at stuff like, is there a corruption there? What's the FX risk? Is there language issues? Can we trust the legal and accounting systems, et cetera? So I hope that just goes some way to answer the question. We could go on next time we meet you, Laura, we can talk more about it.

Our next question is going to come from the line of Andrew Martin with Peak Investment Partners.

Just a quick one on your digitization of pathology. I was really wanting to get some idea of when you feel that, that is going to really kick in and be impactful on the growth?

Yes. So that's a difficult question because it depends on a few things going forward. Yes, I mentioned on the previous question that our first rollout is probably going to be the U.S. And there's no doubt that there will be a lag because there's quite a lot of change involved in this before we start seeing the benefit. So I don't think there will be too much in the '24 numbers. But I think from '25 onwards, it's likely that there will be. And obviously, we haven't quantified them.

Our next question comes from the line of Mathieu Chevrier with Citi.

Just on the margins. Grew base business margins in pathology in line with prepandemic levels in the second half '23. And then going into F '24, are you still carrying some COVID legacy costs.

Do you want to take that, Paul?

Yes, sure. So look, as we try to explain at the first half, trying to work out what is our COVID margin and what is our base business margin was extraordinarily complex. We did our best in that first half to try and do so. But we certainly said that it was an imprecise science. If anything, that got even harder in the second half because as the graph shows in the presentation, the volumes dropped significantly. We had fee cuts in a number of our markets through that period. We had this trend of COVID testing becoming part of respiratory panels. So more and more, it's intertwined with the rest of our business. So basically, it's become impossible to decide what's the COVID margin and what's the base business margin. So I guess, really, what we've tried to do is focus on what we think our earnings are going to be going forward, and we've given guidance for the first time in 4 years, as Colin said. And so, I guess, from that, you can sort of try and work out a margin going forward. We obviously haven't given specific guidance on margins.

Okay. And then just on the Radiology margins. I mean they've been improving. Do you think there's much more room for improvement there? Do you think you've reached a pretty good steady rate?

Yes. Maybe I'll answer that one. Look, the margins in that business have been solid. It's a well-run division of ours. It's benefited a bit, as we've mentioned in the slide from some indexation, which only started a year or 2 ago. So that's starting to flow through to revenue on the bottom line. There's also some changes to MRI licensing arrangements that saw us secure another 8 full licenses, which are in the more regional parts of our business. So look, we're pretty excited. We've got a fairly aggressive strategy for greenfields in '24, including some brownfields, which we define in radiology as being new modalities, being put into existing sites, things like PET/CT and the like. So I'd be reasonably confident that we can continue to grow that business nicely, both at the top and bottom line and probably margins a bit as well.

And if I could add to that, there is a global trend, which moves towards the high-end modalities. So this is not necessarily in Sonic's market. I'll come back to that in a sec. But in general, more people are having MRI, CT and PET CT than before, and that trend is set to continue for quite a long time. So for example, in musculoskeletal or soft tissue injuries, sprains, [ Qv ] fractures, stuff like that, CT and MRI will be used much more frequently than a chest x-ray -- than a plain x-ray. So that's the one thing. The second thing is that in Australia, which is the only market we're in radiology, our radiology practices are very specialist dominated -- in other-- specialist referral dominated. And specialists tend to be heavier referrers of the high-end modalities when compared to GP. So -- and we sort of believe that both of those factors will continue to drive average fee higher, which will feed to earnings and margins.

Our next question is going to come from the line of Andrew Goodsall with MST Marquee.

I'll try and keep it quick. Just looking at your guidance, just trying to understand or whether you can add any color just to how you see that sort of first half, second half weighted. Obviously, your cost base is still unwinding and your acquisitions are sort of second half loaded. So just any other color you can add there?

Yes, Andrew. You might remember that before COVID came along, it was always a bit weighted to the second half, partly seasonal with our Northern Hemisphere business and that sort of thing. It was -- used to be, I think, [ 47-53 ]. That will probably be even more weighted to the second half because of some of the cost management programs we've got and the fact that the acquisitions, in particular, the 3 we've announced that some of them -- 2 of them will only be joining us late in the first half anyway, and the other ones not really contributing to profit until probably the second half anyway. So all of those things will see a fairly heavy weight into the second half.

The U.S. revenue cycle.

Yes, also the...

Also more than that in the second half than the first. Yes.

So there's a few dynamics here that we'll see a fairly -- probably a heavier weighting than we've seen historically.

Yes. That makes sense. It sort of seems the first half is the absolute bottom and then up. Just -- I guess, just one for Colin on -- just looking at the Australian MBS data, I know you sort of do a bit above that number. But it does look like sort of base pathologies. Volumes are fairly flat. Obviously, benefits are up. I'm just trying to -- haven't sort of heard any sort of good explanation of what might be going on there? Or is it -- are we just still in transition?

Yes. So Andrew, to be honest, I don't follow those Medicare stats all that closely mainly because I don't rely on them so much. But I think the one thing just to bear in mind when looking at those comparative numbers, is the issue with GP consultations and the referrals that come from them to pathology. If GP consultations are down, then GP referrals to pathology labs will be down. And we've certainly confirmed this when we look at Sonic's Australian numbers, our referrals from specialists are outstripping our referrals from GPs. So that could be a feature in the numbers for the whole market, which is what you're looking at. And that's probably all I can say about that particular question.

Yes, that probably aligns and it helps explain the benefits being up. That's terrific.

And our next question is going to come from the line of Saul Hadassin with Barrenjoey. Saul, your phone might be muted.

Hello. Can you hear me?

Yes.

Right. Just a quick one. It looks like you spent just over $80 million in the year on acquisitions. I know about $30 million of that was in the first half. Can you just remind me what you acquired during the year?

Saul, it's Paul. Yes, look, there's no single significant big-time home acquisition in that. It's a number of smaller things. You may be aware that our SCS business bought a group of clinics that were owned by a small listed company here in Australia, Beta Group. So that's part of that. There are some other medical center businesses that were acquired. There was a small anatomic pathology practice in Germany. So yes, it's just a number of sort of small businesses that add up to that number.

There's a small investment in a health IT business that ties in with some of our health IT strategy as well, that's part of that as well.

Our next question comes from the line of Steve Wheen with Jarden.

Yes. I just wanted to go back to the margin question. With respect to -- I understand the complexity of being able to separate margins between COVID and base business. I remember in first half, you were indicating that part of the reason you've been able to get to pre-COVID margins was because of longer-term consumable type contracts and EBITDA agreements. And just those 2 line items specifically, I just wonder if there's been any reset of those costs during the second half of the year to perhaps explain some of that margin weakness that has happened in the second half?

So Steve, the biggest impact on margins in the second half is what we've alluded to in the presentation, which is the legacy costs related to COVID. Trying to manage the workforce and the infrastructure when you see those change in volumes by month, it was quite a challenge. And there's no question that we were holding costs longer than we -- as it's turned out, we needed. But if you look at that chart, you even see that in June '23 it jumped up from what it was in May. Now that was live but it was not a huge in dollar terms, but from -- that was largely here in Australia with the Australian winter at the start of the Australian winter. And so we're trying to make sure we've got the capacity to deal with testing when it arises, but that means holding on some costs. So that's, by far, the most significant factor in the second half margin. In terms of, yes, there would have been some EBAs rolled -- there were some EBAs rolled over in that period. And so there would have been some increases that have come out of that. That's absolutely true. But there are others that are still ongoing. I don't think there was probably much change on the procurement front, but I might pass to Chris on that.

No, there's nothing significant on the procurement. But, Steve, as the fees were ratcheting down in the various markets for COVID, we were also pushing down our suppliers, which you might imagine at the start of COVID, there was -- everyone was just desperate to get hold of kits at the price that was being asked. And so that happened progressively over the course of the pandemic, and those prices are now down at more sensible levels given the reimbursement rate. So that's kind of happened. I think there's a bit of information, too, in the 4E just in terms of understanding our labor costs and the components of it that break up the movement between the 2 years that we're comparing here and there's quite a significant impact between the 2 years with currency movement, FX movement and M&A. So we've tried to point that out to you. So you can see that the underlying increase in labor is only a couple of percent, and that's a melding of reduction in labor that's happened and some increases in labor cost.

Yes. Great. Okay. That's helpful. Just second question, and I think I've picked this off the slides correctly. In Germany, in first half, your organic growth was 5%. For the full year, organic growth in Germany is 10%. So that would suggest a really strong second half of 15%, I was just straight lining it. Could you sort of talk to what's happened in second half versus first half to drive that surge?

Yes. So certainly, Oncotype DX is a significant factor there. There has been extraordinarily strong growth in that particular test line. But again, at some of the things we spoke about earlier, the microbiome testing has been growing strongly. And I think coming back to some of the earlier discussion, that there has been sort of a return to more normal activity in Germany in terms of people going to their doctors, et cetera. So we have seen a significant pickup in growth rate.

Thank you. Showing no further questions at this time. This does conclude today's question-and-answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.