Sonic Healthcare Limited (SHL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Sonic Healthcare Financial Year Ended 30 June 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Chief Executive Officer and Managing Director, Dr. Colin Goldschmidt. Please go ahead.

Thank you very much, Amber, and good morning, and welcome to everyone on the call. If I may, I'd like to preface the presentation on our full year 2024 results with just a few brief opening comments, which will be about the financial year and our outlook for 2025 and beyond. In a nutshell, the 2024 financial year can be summarized as a transition period for Sonic Healthcare. As we moved away from what I can only call a tumultuous, even disruptive period following the pandemic, and as we move towards business as usual. But putting the pandemic well behind us, the company remains in a very strong position, both financially and in terms of market positioning. I was keen to highlight just 3 key features, which will drive our earnings and margins into the future. And, of course, we'll cover these in more detail in the presentation itself. Firstly, our organic revenue growth remains consistently strong, giving us the opportunity to leverage our infrastructure and expertise to drive marginal profitability. In many ways, strong organic revenue growth is the backbone of our success as a company, and we certainly do expect that to continue into the future. We do get asked about why Sonic's organic revenue growth is strong. And in my opinion, it relates directly to our long-standing culture of Medical Leadership. And Medical Leadership means leaders who have a deep understanding of our business and who understand doctors. Our CEOs and executives around the world, many of whom are doctors, are all medical leaders, even if they are not doctors. And it's this leadership model that sets in train a successful business formula. Medical Leadership resonates with health care workers and serves to attract and retain the best pathologists, radiologists and GPs, that's our doctor group, as well as technical and other health care staff, too. And then this serves naturally to drive higher quality and super specialized services. And so, these, in turn, will work to attract and retain customers, which then feed directly to strong organic revenue growth. And if it's okay, I'd like to take this opportunity here to acknowledge and thank Sonic's leaders and doctors around the world because I know a bunch of them would be tuned in, for their incredible contributions to our company and our business outcomes as well. The second feature that I want to raise is about M&A. And on the M&A front, we're very much back in business with a series of high-quality, culturally aligned and synergistic labs, which have chosen to sell to us in the FY 2024 year. And I'd point to Germany, Switzerland and the U.S.A. over here. And to join us in long-term contractual partnerships, and I refer here mainly to the U.K.'s National Health Service. These acquisitions and contract wins are also very much based on Medical Leadership, where labs actually prioritize cultural fit and reputation in making their decision to join with Sonic. The acquisitions completed in FY 2024 are material to Sonic and will, not only augment our top line growth, but will also serve to augment our earnings, our margins and our return on investment in the years ahead. And thirdly, I'm very pleased to say that we're now largely complete with our post-pandemic head count reduction program to rightsize the company for our progression into the future. So with that, can I please take you to Slide 3 of the presentation? And on this slide, first of all -- by the way, I did omit to say that I'm joined today by my colleagues, Chris Wilks, CFO of Sonic Healthcare; Paul Alexander, Deputy CFO of Sonic Healthcare; and Dianne Ayers, Senior Executive and Investor Relations, Sonic Healthcare. So on Slide 3, we present a table and just, first of all, looking at our revenue. Total revenue for the year came in just short of AUD 9 billion. But if we take out the COVID revenue, it's $8.905 billion. You'll get a look over there at the significant transition out of the pandemic from almost $0.5 billion of revenue in FY 2023 related to COVID, down to $62 million in FY 2024. And I could use that just to say that the comparatives between the 2 years, hopefully, for the last time, are not quite appropriate given this big swing in COVID revenue. When we look at our EBITDA number, it is in line with our guidance provided in our market update in May just recently at $1.602 billion. Our revenue also does obviously include the beginning of the -- or some of the acquisitions made through the financial year. We called out $655 million of new annual revenue from these acquisitions, plus there is additional revenue coming through from contract wins as well. Our conversion of EBITDA to cash was healthy at 95%. And the Board of Sonic has ratified a dividend -- a final dividend of $0.63 per share, which is up 2%, giving us $1.06 per share for the full year, which is also a 2% increase over the full dividend last year. Moving on to Slide 4 and our guidance. We're giving guidance at EBITDA level of $1.7 billion to $1.75 billion on a constant currency basis. And this too is unchanged from the guidance we flagged at the trading update in May. This guidance reflects up to 10% EBITDA growth on FY 2024. And just an early indication of 2025, our July trading is in line with our budgets and, obviously, our budgets are used to determine our guidance. Depreciation expense as a percentage of revenue will be expected at the same level as '24. And our interest expense is likely to increase by about 25%, reflecting the acquisitions that we've made in FY 2024. The effective tax rate will be somewhere between 26% and 27%. Further guidance considerations, we exclude new acquisitions that might happen. Our guidance does include an AUD 15 million impact from potential PAMA fee cuts in the U.S.A., even though we don't expect those to go through. There are no other regulatory changes assumed. And our guidance also does incorporate an initial AUD 10 million loss from the Hertfordshire and West Essex contract in the U.K., which will become profitable in FY 2026. And just for noting, the FY 2024 EBITDA did include $14 million of acquisition expenses, and we assume in our guidance that interest rates remain constant. On Slide 5, we provide a table for your information showing the acquisitions completed in the FY 2024 year, totaling that $655 million annual new revenue from acquisitions. If we look at Germany, we've got the 2 medium- to large-size labs that's Medical Laboratories Dusseldorf and the Diagnosticum Group, summing up to around AUD 200 million and then 4 smaller acquisitions, 2 anatomical pathology and 2 clinical pathology also in Germany, making up the balance in Germany. And then moving to Switzerland, 2 large acquisitions, Medisyn, which was the former Synlab laboratory operations in Switzerland at AUD 175 million and our most recently announced acquisition, the Dr. Risch Group also at around $175 million, totaling $350 million of new annual revenue, plus a small anatomical pathology practice in Zurich, that's Pathologie Enge. And then when you add PathologyWatch, which was settled in January of this year, $25 million of existing revenue, we get to the $655 million. We add to that 2 contract wins in the U.K. the Whittington Health Trust roughly $20 million in revenue. And the larger Hertfordshire and West Essex Trusts contract, a 15-year contract, which will only commence in Q4 FY 2025. Now, moving to Slide 6. On Slide 6, we've provided a profile here of our key earnings drivers, and we've set them out in a time-based format to indicate roughly when each driver will have maximum impact. So starting with the drivers that are ongoing. I've mentioned and called out strongly our strong base business organic revenue growth, coupled with tight cost control and consequent margin expansion. That's really the bedrock of our ongoing business. We also then are benefiting from annualized or annual fee indexations in various markets and contracts, including radiology in the U.K. with our contracts in Belgium, Sonic Clinical Services and Australian Pathology, which will only begin in FY 2026, but will then be ongoing to a portion of the pathology fee schedule. And then ongoing is also the optimization that we are in -- of our fees that we're involved with in many or all our markets. And these are situations where we are able to set or negotiate pricing. It does represent a significant portion of our revenue, and we continue to optimize this initiative. It's an important one for us. Moving on to those drivers that are specific for FY 2025. First of all, the impact of our post-pandemic head count reduction is very important, and we've done that to rightsize the company, and it's almost complete. Then the sale of the West division in the U.S.A., which will eliminate approximately AUD 15 million of operating loss over a 9-month period in FY 2024. And then the early synergies, which will be coming through from our acquisitions in Switzerland and Germany and the U.S.A. Now, most of those acquisition benefits will be flowing through in FY 2026, especially the Swiss acquisitions, Medisyn and Dr. Risch Group, and we'll be discussing those a bit further in slides subsequent. These are 2 businesses which were acquired at almost 0 margin. And we have a very confident plan loaded to take them substantially higher in the next 1, 2 or 3 years. The synergy benefits that will flow from the German acquisitions will be somewhat in FY 2025, but maximum in FY 2026. I've mentioned the benefit coming from the Hertfordshire and West Essex contract, a loss in FY 2025, becoming profitable in FY 2026. Our enhanced revenue collection system in the U.S.A., that's XiFin, we will get approximately USD 10 million uplift in '25. It's maximal in '26 where we get $20 million to $25 million approximately and still some further benefit flowing through in FY 2027. Just for noting, we haven't yet rolled out the system into our 2 largest labs in the U.S. and that's coming very soon. And that's why this is projected to hit maximum benefit in FY 2026. The inflationary pressures on labor cost is an important point because they have occurred in FY 2024 but are now easing but still annualized somewhat into FY 2025. Therefore, with interest rates staying low, which we hope they will, we will get maximum benefit from this in the FY 2026 year. And just of interest, our headline inflation rates in our markets are in the range now of 1.3% to 3.8%. So the pressure coming on, not just labor, but other costs from inflation are dissipating quite rapidly. And then PathologyWatch in the U.S.A., we expect maximum benefit to come out of that in the FY 2026 year. On Slide 7, we outline the dividend information, which I've already mentioned. The final dividend will be unfranked. Record date 5 September '24, payment date 19 September 2024. And we want to make the statement that we are confident to maintain our progressive dividend strategy despite the unusually high payout ratio of this dividend this year, and we can discuss that further during question time if there are any. On Slide 8, again, for information is our capital management numbers. I guess, the most important thing to see here are 2 things. One, our net interest has increased quite substantially, but that's in line and reflects the acquisitions made through the year. But importantly, to see that our debt cover and gearing are both returning to pre-pandemic averages, and it is our intention to keep them at investment-grade level. Our available headroom at 30 June 2024 is approximately $1.5 billion, but that's before payment of the final dividend. The pie chart on Slide 9 that we normally show despite the fact that the pie -- not despite, the pie has increased substantially since last year. But of interest and just to note changes from last year, Switzerland has increased its relative size. Its segment was 7% a year ago. It's now 10%. That reflects the acquisitions made in Switzerland. Germany has also increased slightly, again, reflecting acquisitions. And it's interesting, if we look ahead, we can anticipate that segments U.S., Germany, Switzerland, U.K., will expand further than the Australian segments only because of market sizes and acquisition opportunity in the non-Australian markets that are available to us. And then we'll move rapidly through our divisional slides. First of all, the U.S.A. on Slide 10. Our base business organic growth there was 3%, which we believe is in line with and possibly even exceeding market organic growth. And from an operations point of view, we have formed a new dermatopathology division, in line with and in order to integrate our PathologyWatch acquisition and its digital pathology platform into our dermatopathology division in the U.S.A., which is substantial. We are aggressively rolling out digital dermatopathology, that's skin pathology, which will drive growth and cost efficiencies in time. We're also -- we have completed a divisional restructure for the whole U.S. operation, which integrates our anatomical pathology with clinical pathology, which we believe will be a much more efficient way to go forward. And we'll also facilitate cross-selling between those 2 subdisciplines of the laboratory profession. There will be a further approximately 120 head count reductions that will occur and will be completed by the end of Q1 of this financial year. I've mentioned that we are continuing to roll out our enhanced revenue collection system. And I've also mentioned the PAMA Medicare fee cuts, which we expect and hope will be deferred once again. And I've also mentioned previously the sale of our loss-making West division. Australian Pathology on Slide 11. Very pleasing base business organic growth of 10%, which we believe includes market share gains. We are strong in the specialist and hospital market, and we are strong in the GP market as well. They are more or less equal. But we have particular strength and expertise in that specialist market where we dominate in the higher complexity testing in pathology. From an operations point of view, there has been a lot of work from all our divisions in rightsizing the company in terms of head count. And we've mentioned here, approximately 400 full-time equivalents have been reduced since the COVID peak in January 2022 with 150 FTEs reduced in FY 2024. We also continued to rationalize our collection center infrastructure, and we've closed a net 50 in the past 12 months. I've mentioned before that indexation or partial indexation of the Medicare fee schedule for pathology will commence on 1 July 2025. We're hoping that this is only the beginning and that indexation will, in the near future, apply to the full schedule. And I also mentioned that we continue to target private billing wherever possible. Moving on to Germany. Again, strong base business organic growth at 7%, and also, like the Australian pathology sector, we are strong at the high-end of the profession with specialists and hospitals being right in our expertise. We've mentioned some of the tests, but these are just a few with genetics and Oncotype DX, molecular pathology, anatomical pathology. These are the high-end tests that we're strong in, in most of our markets. We've mentioned the 2 medium to large acquisitions, that's Dusseldorf and Diagnosticum, which is in the Dresden area and those 4 smaller acquisitions. We've also commissioned recently 2 new labs, 1 in Munich and 1 in Hamburg. These are going to be, not only keeping us at the cutting edge of our game, but will also facilitate multiple mergers, which will drive further efficiencies in the division. Our newly formed anatomical pathology division is performing strongly and there's synergy to come. And there is a proposal to reform the statutory insurance fee schedule, otherwise known as the EBM from January 2025, but we expect this to be net neutral to Sonic if, in fact, it occurs. We've got 2 slides here on Switzerland. First of all, just the ongoing business. Base business organic growth is sitting at 5%. A few bullet points on the recently announced Dr. Risch Group, which was completed March 2024. This has revenue of CHF 94 million in Switzerland and approximately CHF 8 million in neighboring Liechtenstein. Purchase price was CHF 175 million. And about 1/4 of that purchase price has been taken -- of the consideration has been taken in Sonic shares. 650 lab staff, 13 laboratories in Switzerland and 1 in Liechtenstein. And we're delighted that the founding family pathologists, the Risch Brothers, both pathologists will now form integral positions in our new senior management teams in Switzerland. I've also previously mentioned Pathologie Enge, the small anatomical pathology lab in Zurich, which will integrate nicely with our anatomical pathology in Medica, which is the largest lab in Zurich. And we've mentioned Medisyn, which is the previous Synlab Suisse operations, roughly CHF 100 million in annual revenue. The second slide on Switzerland is an important one, and we show you the map to give you a sense of the very substantial operations that we now control in Switzerland. It's made up of now 4 large lab operations: 1, Medisupport; 2, Medica; 3, Medisyn, that's the former Synlab operations; and then the Dr. Risch Group. And we're now well advanced in pulling this all together to form 1 unified national group. It will be called Sonic Suisse, the parent company, but we will not brand that name necessarily. And this initiative is going to be led or is being led by CEO, Blaise Mentha, and he has pulled together a power pack management team with representatives from all 4 of these divisions. And you can see that this covers the entire length and breadth of Switzerland, all 3 language regions and 5 smaller regions within Switzerland. So we will be retaining brand names, which is very important in all our markets and especially in Switzerland, but that's what we do. But everyone will be unified under the Sonic logo and the Sonic colors. There are major synergies ahead here, and this work has already commenced. So multiple laboratory mergers, procurement, IT integrations, logistics, corporate services and others. And these will progressively flow through from a 0 margin start in 2 of these businesses, that's Risch and Medisyn to hopefully something pretty substantial in terms of EBITDA margin. And as said before, probably maximal impact or weighted at least to FY 2026 and beyond. So we're very excited about what's going on in Switzerland and real kudos to our team over there. Slide 15, U.K. Strong base business organic growth at 9%, and that strength is shown in both our private business, TDL and our NHS business, HSL. Our contracts with the NHS are indexed, and we have pricing power in our private work in the U.K. We've mentioned the 2 NHS contracts, and we are currently bidding for further NHS contracts at the moment. Belgium base business organic growth here was flat. Impacted by a fee cut of 15%, which kicked in on January 1, 2024, but which was offset by fee indexation of 6% starting at the same time. So this was a net negative of 9%, but we are mitigating that through price increases for tests, not on the fee schedule, and also an increased focus on automation and efficiency gains. It's interesting in Belgium, Belgium is moving towards doing primary HPV testing for cervical cancer as has already been adopted in Australia and elsewhere. And our lab in Antwerp AML is very well positioned as a natural and national reference center for cervical cancer. So we're sitting in a very prominent position in terms of this change taking place in Belgium. We're also trying to expand our test menu as much as possible in our market in Belgium. The radiology division, Slide 17, very strong top line growth, 11%, of which 10% is organic. EBITDA growth was 14% with margin expansion of 70 basis points. There's an ongoing trend towards higher modalities in radiology in general. Fees are now indexed annually at 3.5% was the indexation from 1 July 2024. We've established 6 new greenfield sites in the '24 financial year, and there's a further 7 planned for this financial year. And we have commissioned 6 additional MRI scanners and 4 additional PET CT scanners in FY 2024. And we are increasingly using AI tools in our routine radiology reporting. Slide 18, Sonic Clinical Services. Revenue growth was 13%, organic growth was 5%, EBITDA growth 9%. Our growth in the GP division reflects the increased government funding, that's the tripling of the bulk bill incentive for those in Australia on the line, but also our increase in private billing as well. GP service fees are now indexed, and again, it was 3.5% from 1 July 2024. And we're in the process of ramping up our capacity to begin our fairly substantial Australian Defence Force pre-recruitment contract. On Slide 19, we just revised and outline our activities in the digital pathology space. This is an important area for Sonic Healthcare. We are one of the largest anatomical pathology companies in the world when you put all our AP together. So anatomical pathology, as we've said before, is undergoing a revolution from its analog methodology to digitization and the use of AI tools. And we, at Sonic, are mindful to stay at the cutting edge of this revolution, given our size and our expertise in this sub-discipline of pathology. So our acquisition of PathologyWatch was a step in that direction completed in January 2024. PathologyWatch, just as a reminder, has this brilliant AI-enabled digital platform for skin pathology and we are currently rolling this out in the U.S.A. first, and that will be followed by rollouts in other countries, probably Australia second and then our European operations as well. And then our investment in Harrison.ai and its subsidiaries. So firstly, Franklin.ai. Franklin.ai is a joint venture for pathology AI. Sonic owns 49% directly and another 9% indirectly. And incredible news is that Franklin.ai's first anatomical pathology AI product, which is called Prostate Digital is now complete with excellent results. This is an amazing product that picks up around about 40 to 45 findings on prostate biopsies or what we call chips, which come from the transurethral resection of prostatic tissue. And it's being -- it's going to be deployed for clinical evaluation in Sydney, Sonic's DHM lab first up, and that will commence in the second quarter of FY 2025 and then other labs will follow. Prostate Digital is going to be formally launched at the European Congress of Pathology in just in a few weeks' time. And we are in the process of applying for regulatory approvals in Australia and in the EU. And then moving on to the radiology product Annalise.ai. This is a radiology decision support solution. Sonic's ownership is 18% via the parent company, Harrison.ai. And Annalise already launched 2 products, a chest X-ray product and a CT brain product, and has had great wins across Australia, Asia, Europe and the U.K. Both those products are now in use by Sonic and I-MED, the 2 largest radiology providers in Australia on a routine basis. Annalise has won 80% of the recent NHS England tenders for chest X-ray AI, and will soon be analyzing about 1/3 of England's chest X-rays, which, again, is an amazing achievement. And there's a further CT brain finding, which has received separate reimbursement by U.S. Medicare, which will begin later this year. The next slide is just to let you know that we are making great progress with our ESG program. And all of the details of this will be published in our Sustainability Report in November of this year. And the final slide, Slide 21, is just an outlook summary to say that we are enjoying leading market positions in the countries which we operate, in the markets which we operate, and particularly in the specialist and hospital market segments. I've emphasized our strong organic base business revenue growth, which we believe will be ongoing, and it's underpinned by Medical Leadership and brand differentiation and our excellent reputation and high-quality services. We're back to margin expansion, which is supported by our ongoing revenue growth and cost control and operating leverage. And we've tried to call out in this presentation the specific drivers, which will further enhance our earnings and margins, such as synergies from M&A, new contracts, lower inflation, technology investments and others. And we have further acquisition and contract opportunities under consideration at the present time. Thank you very much, and I'll hand you back to Amber to conduct the question-and-answer session. Thank you very much.

[Operator Instructions] Our first question comes from the line of David Stanton from Jefferies.

Can you hear me okay first? There's a bit of background for a second. So one for Chris, if I may. Could we get some color on what we should expect for amortization for F '25 see if F '24 should we be thinking about the same kind of increases we're going to see for depreciation, please?

Yes. Look, I think the -- you're talking about amortization of intangibles here, Dave, I guess.

Yes.

Yes. Look, the growth should be probably similar to what you've seen in '24. It's a result of kind of fairly significant investment in IT tools around the Sonic world. So, we haven't given specific guidance on that. But yes, if you make that assumption, you'd be pretty close.

A significant part of that increase, Dave, is to do with the PathologyWatch system, where we apportion part of the purchase price to the identifiable intangible, and therefore, amortizing it.

Yes. So in '24, we only had half a year of that because we only settled in January. So I think from recollection, it's something like $3 million extra a year or something like that.

Very clear. And then back to Colin. I'd be very interested to understand in Australia, how are you going to go about private billing. Could you give us some more color and potential subtypes of pathology where you think there's an opportunity to increase private billing rates?

Yes. So there are a number of areas where this is happening and hopefully, or possibly increase happening. So first of all, we are free to private bill any test that's covered by the Medicare schedule. That obviously has patient gaps associated with it. But that's been around for a long time and has the potential to actually increase particularly where there are tests of higher complexity. There are also tests on the schedule, which have description restrictors. And a good example of this is, say, a PSA, which I think everyone understands what a PSA, the prostate-specific antigen test. There's -- if you're not doing it for any other purpose than a screen, you can only do that once every 2 years. Well, if people want to have a prostate -- PSA test every year, that's an example of a test that could be privately billed and is being privately built where patients are quite happy to pay for that test, even though it's not reimbursed by Medicare. But then there's a whole bunch of tests that are actually not on the fee schedule. And we -- so these are less common tests, yet important tests, which we offer. So many of the genetic tests, for example, are not on the fee schedule, and we bill those privately and we can set the fees over there. The other big area in Australia is, our hospital work, which we have plenty of where we have the opportunity to negotiate with the health insurance companies from time to time.

Excellent. And my last question, you mentioned that there may be a change to the EBM in Germany and you said that's net neutral. I wonder if you could give us more color on that in terms of changes that are sort of proposed in terms of reimbursement, if that's okay.

David, it's Paul here, yes. So the proposed changes include some cuts to fees for specific tests, but then there are offsetting increases to a number of different items, things like transport fees and electronic ordering fees. And because Sonic -- and also pathologist-related fees. So because Sonic employs a lot of pathologists in Germany and because we lead the market in electronic ordering with our star.net system, when we model all of that out, it comes out roughly neutral to maybe slightly positive. Now, there is still lobbying going on against this reform because it's not going to have the same result for all players. And so, it's not certain that this will occur. But our best estimate is that, it's neutral from our point of view.

Our next question comes from the line of David Low from JPMorgan.

Could we start with the U.S. and the reason that the Western region was sold? And maybe if I could get you to expand a little bit on to the underlying organic growth, which frankly looks fairly soft versus the rest of the world, and we don't seem to have seen much of an uplift post-pandemic. And then I'll throw into that, the anatomic pathology, if you could give us an update on that specifically as well, please?

So just on the U.S., so the Californian market or the West -- our Western division is quite different from some of -- from the other divisions. There's different dynamics in how pathology is paid for. There's a lot of capitated work over there. And we've tried various initiatives to turn this business around. And in the end, the decision was made that this would be the best thing for Sonic. And so the sale of that division doesn't impact any of our other divisions, and it kind of makes sense, it was a logical thing to do. We don't have the same issues that apply in California elsewhere. So that's that one. You wanted to know about the base business revenue growth. It's very difficult for us to actually determine exactly what the market growth rates are. We look at the information that comes from published XiFin information, and we're certainly substantially above that. And then we look at the results of some of our competitors, but the problem with comparing to our largest competitors, our 2 main competitors is that we believe that they might add contract wins from hospital deals into organic growth or into revenue growth, that's nonacquisitional. So our best estimate is that our 3% growth is at or better than the market. Then your third question was about anatomical pathology, but you didn't specify what you wanted to know about it.

Okay. Let me cut in then. The 3% is at or better. Why is the U.S. market only growing at 3%? It seems pretty disappointing relative to what we're seeing elsewhere. And then on anatomic, we're aware of the large acquisition from quite a few years ago now. Just like to get a sense as to how that part of the business has been performing sort of relative to the clinical labs, please?

Yes. So it -- why the U.S. market is not growing at the same rates elsewhere? I don't have an answer to that question. And in terms of our anatomical pathology division, we've -- we are working very hard to grow that business, and we believe that the PathologyWatch acquisition, in particular, is going to give us impetus to take it quite a bit further. We don't separate out. We haven't given the market any specific subdivisional market growth information. So I don't want to actually go beyond what I can say. I don't know if you guys want to add...

I think we can probably say that the derm part of the AP business in the U.S. is about half of it. And so I think we're expecting and we've seen signs of this in the last few months that the benefits that come from using PathWatch (sic) [ PathologyWatch ], the digital side of it, the attractiveness that has to dermatologists, et cetera, is we're seeing some good growth in that in recent months. I don't know whether we're going to wait to see how that goes in the medium term, but we'd like to think that we'll get some benefit out of that. I think Colin alluded to in the slide that we're folding the AP businesses into the CP businesses by division so that they'll probably be -- there'll be a bit more direct oversight of those businesses than we've had in recent years. So we're expecting that to help underpin further growth in those businesses and cross-sell between the clients we have in CP and the clients we have in AP.

So David, a summary of this is that we've got -- we're very optimistic about where it's going to go. There's a lot in plan for that AP division. And there's a lot to talk about in it. For example, we do a lot of thyroid fine-needle aspirations which is part of anatomical pathology, more than perhaps any lab in the whole world. And out of that came this test, ThyroSeq, which is a blockbuster for us. Now if you include ThyroSeq in the AP division, it's a molecular test and many people do, then the division is doing extraordinarily well. But as Chris has pointed out, we're doing a bunch of things to try and maximize our footprint to the benefit of the AP division. That means bringing AP and CP together so that we can cross-sell, and that -- and restructuring the whole of the U.S.A. so that there's more intent management on these multiple smaller AP practices that we bought to in the Aurora business that you're referring to. So we should probably move on given that...

Our next question comes from the line of Lyanne Harrison from Bank of America.

I might just follow on there from David's question on anatomical pathology. Can you give us a sense or quantify what the size of that cross-sell opportunity might be in the United States? And also where you -- what you think the size of the opportunity might be in Germany with your new division there?

Yes. So -- and this is going to have to be a nonspecific possibly even vague answer. Here in Australia, just to put it very clearly, AP and CP have grown up together in a single lab. And so if you won some AP business because you had super specialist expertise in, let's say, gynecological pathology, you would get the bloods from that gynecologist. That would be the logical thing. Now in the U.S. and in Europe, AP and CP have grown up quite separately. The training is different. The labs have been separated out, so that you have stand-alone AP labs and stand-alone CP labs, which are clinical pathology labs. And so historically, the cross-sell has not been a factor in these markets. So Sonic's coming along and saying, well, hey, hang on, there's obvious synergies and benefits to the referrer, to the customer clinician in having all your tests done in the one place. So we can only be hopeful at this stage, but we don't want to hype it up too much. We don't have any numbers in our guidance that specifically relate to cross-sell benefits. But we think there could be a significant upside into the future. We think this is the right strategy at this stage.

Okay. And on that comment on guidance, if we could come back to that. You mentioned earlier in your prepared remarks some guidance assumptions. I just wanted to understand, is the benefits of that revenue collection program, I think it was something in the vicinity of $10 million for '25. Is that in that EBITDA guidance number?

Yes, it is.

Yes, it is. Yes.

Okay. And then also that PAMA fee reductions and the potential for it being deferred, when will that decision be made?

Probably before the end of the calendar year. We -- we'll have to know before the end of the calendar year. So -- and it comes late.

And it's only December, I think, for a January start. So it's not much notice, but that's when we historically have heard.

Okay. And that $15 million, if it is deferred, that would all fall into EBITDA in terms of a benefit there?

Yes.

Yes. It would. Yes.

Okay. And then the last one is these head count reductions that you're talking about. You flagged 120 people, I think it was the United States and the like. Are there any costs associated with those head count reductions for '25? Or is it natural...

It's relatively -- no, it's -- they are -- the decisions that have been made, so it's not natural attrition. And the main part of that cost, because when the announcement was we have accounted for in the '24 year. It's only a few million dollars...

You've already provided for that. Okay.

Yes.

Our next question comes from the line of Gretel Janu from E&P.

I just want to start on the margins. So I know you don't disclose margins by region, but I was wondering if you can give us some indication as to which regions are dragging on the recovery of margins, seeing greater cost inflation and then which regions are exceeding. Any color there would be helpful.

Well, as you say, Gretel, we don't give margins per business. So it's a little hard to really answer your question there. We've noted this head count reduction in the [ U.S. ] So you might draw some influence out of that potentially. But in general, we've seen good margin growth in the second half of FY '24, more than the usual level. And so we think that sets us up pretty well heading into FY '25 across our group.

I think it would be fair to say that in our budgeting, the improvements we'll be seeing or expecting to see in margins is pretty much across the board. So it's not like there's one major outperformer that's -- and another that's a laggard. It's -- every one of our businesses are doing things to grow their business and improve their margins.

Great. And then just in terms of the head count reduction. So when we look forward from here, I just want to be clear, you said that you're largely complete on that. So are we thinking about that margin improvement just going to be driven from revenue growth and mix and not further cost reduction?

Because the reductions occurred through the FY '24 year and the U.S., the ones that we're now talking about in the first quarter of '25, clearly, there's a -- there'll be a bigger impact of all of those changes in '25 than they were in '24. So there certainly is margin improvement to come from what we've already done.

Yes, but no further cost reductions that you're pulling out?

There's always cost things we're pulling, Gretel, but not necessarily in labor. In some ways, if you're growing at -- you saw from the year -- last year, it's organic growth of 6%. If we can continue something like that and keep our labor largely flat, then we should start to see some leverage in the business and the improvements in margins flowing through.

Great. And just to confirm then, just in terms of cost inflation on your labor at this point?

Well, I think we've sort of tried to call that out that we did have inflationary or CPI related pressure on labor in the FY '24 year, which is kind of overlapping into FY '25 to some extent. But following the annualization of that, we see the pressure falling dramatically given inflation rates. And now we gave you between 1% and 3%, something like that in all our markets.

And particularly in our Northern Hemisphere, in Europe, I think the 1.3% relates to Switzerland, but markets like Germany, I think, about 2.2%. So I guess when we get to the next annualized review of salaries, we're hoping that those lower inflation numbers will reflect in pay increases rather than -- and we're beyond the large inflation peak. Yes.

Yes. And clearly, we've seen that here in Australia with the National Wage Case. The previous year, it was 5.25%, I think, and this year, it was 3.75%, I think, off the top of my head. So certainly, from an Australian point of view as well, that's helpful.

Australia is the highest inflation market right now.

Our next question comes from the line of Andrew Goodsall from MST Marquee.

Nobody there.

Andrew, your line is open. Please ask your question.

Sorry, there we go. There we go, sorry. Helps if I remove the mute. Just looking at the Australian business, the -- if I've got it right, you closed about 2.8% of collection centers, but you grew 10%, which, unlike one of your peers is pretty damn good growth in that sort of situation. So, yes, I'm just going to try and get a bit of color around the strategy there because it seems -- and then finally, sorry, just -- is it a case of yours to lose if you've got that share back or are you taking that share?

Yes. No, I don't think we're going to lose it. So I mean, that would be part of our strategy, Andrew, is that I've always contended that there are far too many collection centers in Australia. We have more collection centers per capita than by a long way than anywhere in the world. So -- and they're expensive. So because we are strong in the specialist market and hospital market, the hospitals don't rely on collection centers. Specialists don't rely on GP-based co-located collection centers either. And so our strong growth in the specialist market, which includes hospitals, is kind of independent of those collection centers. And then in the collection area, we're keen to have a combination of collection centers in the bigger, busier medical centers, but also to have stand-alone collection centers, which are free for all comers to attend. And that's the strategy that we're pushing. And so 50 net closures with strong growth, I think it's a very good outcome for the Australian division, and we certainly hope to continue on that path.

Right. And just on -- yes. Yes, sorry. And just on the guidance, the one I've just focused in on a bit is the -- just the interest cost coming up 25%. So I presume that's a mix of acquisitions, perhaps a higher dividend. Just maybe just any commentary you've got around rates or any other factors I'm missing?

Yes. So Andrew, by far, the biggest driver is the M&A that occurred in FY '24, but we did refinance or in the -- sorry, we've raised some debt in the U.S. private placement market that we've announced a few weeks ago, which will replace debt that's maturing in November this year and the debt that's rolling off was done at a coupon of like 2%, whereas we're now paying 4.1% under that new deal. So there's some higher rates there. Also, our bank debt facilities, the margin tends to be tied to a margin grid based on net debt to EBITDA. And as you can see from the chart on our capital management slide, that ratio has risen, and so the margins on our bank debt will be up a little bit as well. So it's a combination of those factors, but it's mainly the M&A.

And just go forward, so that sort of -- I think you said 4.1% rate is sort of probably your go-forward number? And do you have further...

Well, that's for that specific deal, Andrew, for euro, long-term euro funding, that's not the cost of debt across our group.

That's an average 10-year fixed rate for that particular...

Got it. Okay. And what would be -- what sort of average rate should we be thinking about then?

Good question.

You got them stumped.

If you look at it by current year, it's across the group, but...

It's probably not too far from that fall. It might be like…

Actually a little less with some of the historic things still rolling off, but we can get back to you on that one maybe, Andrew.

No problem. Appreciate it.

Our next question comes from the line of Craig Wong-Pan from RBC.

I just want to understand the U.S. West division. How long has that been loss-making? And has it always been around that sort of $20 million loss level?

Yes, it's good question, Craig. It's an interesting one because we -- it was struggling a bit running into COVID. And as you might imagine, during COVID, it was very profitable. So we had a business that was like most of our business was contributing good profits, but it was when I guess those COVID revenues drifted away that we started focusing more on it. And I think Colin has touched on it. It was in a U.S. context, California has got some quirky aspects to it that make it a little more difficult to do business and make decent margins in our game, and you have to be a certain scale. And this business was kind of sub $40 million revenue. And unless we could find some decent acquisitions to add on to it, it was always going to be difficult to get it to profitability. So selling it for a chunky amount to -- it's a bit galling, but to a competitor getting rid of the loss, getting the cash in the bank, economically made good sense and we can focus on the other divisions that have got good growth opportunities in that market.

Okay. Fair enough. And then the CapEx for this year, could you provide any expectations for how we should think about CapEx?

Yes. CapEx for the year just gone was reasonably chunky, and it had some -- it was something like $470 million and had about $130 million worth of building CapEx in it. And next year, likewise, we've got the acquisition, so that makes things a little bigger anyway just because we're a larger business. But we also have a building acquisition. I think I can probably disclose the fact that we're planning on buying the Costco site in Docklands in Melbourne to renovate that and turn that into the Victorian hub for Sonic and a new home of Melbourne Pathology. So that's an amount that for the site will be close to $100 million, but also where as a management team and as a Board looking from a capital management perspective at whether or not we might consider some sale and leaseback on our property portfolio, which is with that building in it, it's kind of close to $1 billion worth of property, which normal yields, call it, 5% is not what we would normally expect from our business. So that's something that we might be thinking of down the track.

Okay. Last question, just on like the Slide 21, when you talked about further acquisition opportunities, and I know you always look at opportunities. But given that you've undertaken a fairly large number of acquisitions, your kind of debt coverage ratio is approaching that prepandemic level. Just wanted to try and understand how hard are you pursuing other acquisitions? Or are you kind of more focused now on integrating those businesses you've just done?

So yes is the answer to the last point. We're very much focusing on the businesses that we have acquired. And we are being highly selective in terms of what we look at right now. So obviously, if there's opportunities that come along that are highly synergistic, that make a lot of sense from a value creation point of view, then we believe we should still look at those despite the fact that we've been very active on the M&A front recently.

Our next question comes from the line of Saul Hadassin from Barrenjoey.

Yes. Maybe the first question, just on guidance and the EBITDA with growth mentioned at the top end of 10%. I'm just wondering if you're willing to give us a sense of how much of that you think is organic. Just cognizant you've acquired that $655 million of revenue through FY '24. Trying to get a sense of how much EBITDA you think is going to come from that total revenue stream that flows through? In other words, what's organic versus acquired?

That's the...

Look, we haven't quantified that, and I don't think we're really in a position to on this call.

I guess the assumption though that you're assuming at least some degree of organic growth. Is that fair to say?

Yes, that's fair to say. And we've given some guidance in that earnings slide, when you have a closer look at that, I think Colin has gone through some of the '25, '26 effects. Certainly, the 2 big acquisitions in Switzerland, it will take some time for those to go from a close to 0 margin to what we would expect. And probably the weighting of that is probably more into '26 than '25. The businesses in Germany, if you go back and look at the announcements, they're good, solid, profitable businesses. So there's a contribution from those in the numbers, you can probably work it out.

Sure. And then just on -- again, back on this discussion around cash flow and debt levels and considering the high final dividend for FY '24. So you've given EBITDA guidance, you've given us interest and tax, you've given us CapEx, running all of that through, I think effectively, we get to a point where, once again, it looks like net debt will go up to fund that high dividend payout. I mean, again, Chris, from your perspective, you're happy to sort of eat into that debt headroom to cover the high dividend. Just your thoughts on, as you say, capital management and interesting around the sale and leaseback. But for FY '25, is there an expectation that ex further acquisitions, you're still going to see net debt increase at the end of the year?

Yes. Look, I don't -- just off the top of my head, I don't think you've got that quite right. I don't think that net debt, all other, no other acquisitions should be the right outcome. Probably it' s better than that. We feel pretty comfortable with the dividend strategy. You might remember if you go back in '21 and '22, our payout ratio was -- had a [ 3 ] in front, it was like 30%, 33% or something. So whilst this payout ratio is relatively high, we feel comfortable that with the growth we're expecting in profitability, we can keep our progressive dividend and without borrowing to give effect to that. So yes, we're pretty comfortable with the position going forward and the maintenance of that policy.

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

Could you talk a little more about the work you still have to do to optimize your Australian collection center footprint. Is the 50 that you've achieved in terms of closures over the last few months more than you were expecting, less than you were expecting? And is there any more to come?

Yes. So I can't give you a definitive answer there, Laura. But I need to say that what I've said to one of the previous questions is that we are looking very closely at our collection center portfolio and being very stringent with the template and model that we use to determine whether it makes sense to run a co-located collection center. And obviously, that is dependent to some extent on the rent that's paid and how those can be negotiated, how they viewed in terms of the government, et cetera. So I would say that it would be our intention to continue reducing collection centers where possible, and I'm pretty certain that will continue and particularly in the co-located collection center group. Because, as I said before, I just think there are in an industry like the pathology industry, which has not, in our view, been adequately funded over a long period of time, the impost of too many collection centers is one way of addressing that problem and reducing your costs.

Okay. Understood. And then just looking at your press release from this morning, I'd like to ask about the cash collections issue in the U.S. has caused by the Change Healthcare event. At what point do you think that's fully resolved? And what are the main reasons those debts can't be repaid fairly quickly?

So the -- we are now back to billing in all of our divisions in the U.S., but that's a fairly recent thing in just the last few weeks. So that will resolve over coming months, and we will start to repay the advances that we've received as we collect the cash from our customers.

Okay. And then maybe just finally...

I suspect that most of this financial year to shake out given the level of work required.

Okay. And then maybe just finally, could you just talk a little bit about the CapEx that's required for your plans for the Imaging division versus where else you might deploy that money in the coming year to 2 years?

So we've called out that there are a number of greenfield expansions, both in '24 and for '25. But there generally are greenfield expansions every year. So I think we usually talk to a rule of thumb of CapEx in radiology of something in the order of 8% of revenue, somewhere around that as sort of the long-term average, and that includes both growth and maintenance CapEx.

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

Can you hear me? Because that was cutting out.

Yes. Yes.

Yes, yes. I just wanted to focus on the U.S. and in particular, your peers are calling out some concerns around the FDA's involvement with -- and the ruling around their oversight of lab developed tests. I just wanted to get your perspective on that and the likelihood of it proceeding the rule as is and whether or not it has any implications for your business.

So just a headline, it does not affect our business to the same extent that it might affect our major competitors in the U.S. I think there's a long way to go before this actually can become law. And within our U.S. division, there is no major concern at this point, and it might be that we have a different mix of tests compared to our major competitors over there.

Yes. I think, there's another issue in that we -- a lot of our tests are approved by the New York State and one of the proposals in these new systems, if it's been approved by the New York State, then the FDA doesn't stick its nose into regulations. So certainly, the feedback from our team is that they -- even if it happened, they don't see any significant impact on our business, Steve.

Yes, okay. And just as an example, the testing like ThyroSeq that you've got, is that something that would be captured? I know there's some grandfathering of this of tests that are already in operation. But is that something that might -- I'm just looking, for example, within your business that might apply?

That would have applied. However, as Chris mentioned, so ThyroSeq has New York State approval and therefore, effectively be grandfathered. But you're right, that's the sort of test that could be caught under these provisions.

And it took us quite some time to get that approval because it is a new unique test, but we have got it. New York almost runs their own little mini FDA, a source of frustration, but it's just the way it operates.

Okay. Understood. And sorry to ask just 2 other questions, again, raised by your peers, but just it's interesting, your business is obviously quite different to there. So it's important to understand how it might affect you. But one of the issues was that they're starting to see the impact of higher doubtful debts in the U.S. because of deductibility level in various insurance policies are increasing -- the deductibles balance, sorry, is increasing. And so is that having -- is that playing out in your business? And then secondly, the composition of testing that you do for preemployment, they're seeing a lot of pressure in volume there. Just wondering if that's having any impact on you as well.

We haven't seen any evidence of doubtful debt issues or any change in trend there, if you like. And then on the preemployment, I don't think we do much of that work in the U.S. market. We don't -- haven't seen an impact from that either.

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

Yes. Just on Page 2 of the financials explanation and results, there's usually a constant currency P&L there. Just wondering what the impacts of FX were in fiscal '24 for both EBITDA and NPAT, please?

So we didn't bother including that this time around because we didn't give guidance on a constant currency basis as we usually do. So there wasn't a particularly relative measure, and there wasn't a lot of movement. You can see the impact on revenue if you go to Page 4 of the Appendix 4E, we show the constant currency revenue there at $8,685 million versus statutory revenue of $8,967 million. So there was a bit of a headwind in the year, but it's not all that material. And certainly, as you get further down the P&L, it gets much less significant. So I don't have those numbers in front of me to give you the exact numbers, David, but they're not hugely different from the statutory numbers.

It's a decent benefit to EBITDA and NPAT in the first half. And then maybe just in terms of the cash flow, there's proceeds from sale of noncurrent assets stepped up to $150 million. Just wanted to -- interested to what's -- interested as to what's driving that.

So the biggest factor in that is the sale of that U.S. West division that we've talked about.

Our next question comes from the line of Andrew Paine from CLSA.

Yes. Just you spoke about margin upside from the Swiss acquisitions, and I understand you're not able to give specific margins, although I don't think I did hear you say that close to 0. But just be good to get an idea of the magnitude of the uplift in margins that you're expecting in this region, there's a bit of an extension to that. You also said all businesses looking to grow margins. Just trying to get an understanding of what regions you expect higher margin growth given the plans within each of these businesses?

So in the Swiss -- case of the Swiss businesses, I just say of off the top of my head that coming from 0 EBITDA margin, we would like to see those heading up towards 20%, but that's going to take some years. It will take 1, 2, 3 years. And in a steady-state situation, that's assuming nothing untoward happens in the interim, which gives us a lot of upside there. And the second part of your question is that all our divisions are working incredibly hard to raise margins. I mean that's where we're at. We've come off this crazy period of the pandemic 4 years or a bit more. And now is the time to start growing our margins. And as Paul pointed out a bit earlier, we've got some good lead evidence that we are back to margin expansion when we compare H2 to H1. And we would certainly expect all our divisions to be working towards margin expansion, and that's what we are expecting.

Okay. So are you able to provide kind of any insights on to the actual regions that are expected to outperform in terms of margin expansion?

Yes. So as you know, we don't give the market any sort of earnings by division. I think Chris or Paul mentioned that there's quite a lot of head count still to come in the U.S. And I guess...

We had mentioned, [ Colin ], in the earnings update some specific things that you can pick out that you'll be able to tell which countries they relate to. And it's pretty fair to say that the leverage benefit you expect to get is always stronger when you've got strong revenue growth. So if you look at each of our countries, you'll see some have got -- they've all got pretty strong revenue growth, but some have got better than others. And so you'd like to think in an environment where we're -- if we're keeping reasonably good control over costs, and if we're growing at 7%, 8%, 10%, then you'd be disappointed if you didn't grow your margins in that scenario.

And then you've got to add to that the impact of synergistic acquisitions, which will actually swamp organic growth and synergy capture as well. So if you look at a country like Switzerland, there's potentially a lot of upside there just from what we've said about the mergers and from the acquisitions that we've made.

On the flip side, obviously, the NHS contracts that we've won in the U.K. do tend to be at a lower margin than our average margin. And so there is some dilution from those contracts. Their earnings enhancing, their return enhancing, but they are at a lower margin. So the U.K. margin will look a little different with the additional revenue from those contracts.

Yes. Okay. That all makes sense. And just one other thing, following your earlier reasoning behind the sale of the West division. You said there aren't any other businesses that are facing similar issues. But are you considering any other sales even if they're not loss-making, but maybe lower growth areas?

No, we're not.

Okay. That's clear.

[Operator Instructions] I'm showing no further questions now. Thank you very much for all your questions. And with that, we conclude today's conference. Thank you for your participation. You may now disconnect.

Thank you, Amber.