Sonic Healthcare Limited

Good day and thank you for standing by. Welcome to the Sonic Healthcare Financial Year ended 30th June 2025 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. And I'd like to hand the conference over to Dr. Colin Goldschmidt, Chief Executive Officer and Managing Director. Please go ahead, sir.

Thank you very much, Amber, and good morning and good day to everyone on the call. Colin Goldschmidt is my name, CEO of Sonic Healthcare, and I'm joined today by my colleagues Chris Wilkes, CFO of Sonic, and Paul Alexander, Deputy CFO of Sonic Healthcare. We're pleased to present our full year results today. And if I could direct you, we'll start the presentation with our headline numbers, which I'm hoping is slide three. I understand last time we were a bit out of sequence with the page numbers. But the headline slide shows a table of our headline results. And just a note on the table itself, the FY2025 numbers are obviously the actual statutory numbers. And we've asterisked the FY2024 comparative numbers to flag that they have been restated to exclude the $32 million gain on the sale of our West Division in the USA. So revenue came in at 9.645 billion, which was up 8% on the prior year. EBITDA came in at 1.725 billion, up 8%. Net profit was 514 million, up 7%. Cash generation came in just shy of 1.3 billion. And earnings per share for the year came in at 106.7 cents. And then moving from statutory to constant currency numbers, we achieved our guidance for the year with EBITDA of $1.702 million on a constant currency basis. And then adjusted for non-recurring items, our EBITDA was $1.730 billion. That's on a constant currency basis. I draw your attention to the box at the bottom. We have a slide in the appendix, I think it's the first slide in the appendix, one of two, which gives detail on the non-recurring items. Organic revenue growth for the year was 5% and our normalised EBITDA margin expanded by 40 basis points for the year. And here again I refer you to the appendix for that margin analysis detail. On the subject of margins, we continue to be sharply focused on delivering ongoing margin expansion and of course we'll achieve this through our ongoing strong organic revenue growth and our cost efficiency programs. And just a point to note is that our margin expansion has been achieved despite some of our acquisitions and contracts having lower margins than SONIC's prevailing margins at the time of acquisition. So a good example of this is the Hudson West Essex NHS contract in the UK and our recent acquisitions in Switzerland. And in each case, the margins will lift in time as our synergies kick in, but initially they are actually margin diluted. So there's a balance that we're up against in driving our margin growth, which we are confident to achieve going forward. Our cash generation from operations was strong, and that was mainly due to higher tax payments in the prior year. And then looking to the FY2026 year, we expect strong earnings growth driven by organic growth, our Swiss and German synergies coming through in particular, the LADA acquisition in Germany, and a range of initiatives in the USA. And I guess it's important for us to say that our FY2026 EBITDA earnings guidance equates to EPS growth of up to 19%. using current exchange rates. If we go to the next slide, which is our guidance, and we're guiding for the FY2026 year to 1.87 to 1.95 billion on a constant currency basis, which equates to a 1.94 to 2.02 billion dollar EBITDA using current exchange rates. You'll see that the range there is now 80 million, which is a bit wider than our previous 50 million EBITDA range. And I will say here that this is not an indication of lack of confidence in our budgets, but rather a reflection of increased company size. And it's still about a 4% range out of that total EBITDA number. We've expanded it slightly mainly to cater for synergies coming through from Switzerland and Germany and especially the LADA acquisition. And if appropriate, we'll have an opportunity to reassess the guidance at the half-year mark and possibly tighten up the range at that time if it makes sense. So the guidance that we provided reflects up to 13% EBITDA growth on FY 2025, and that equates to about 16% growth using current exchange rates. And then talking about depreciation interest and tax, depreciation expense as a percentage of revenue is expected to be in line with FY 2025, Interest expense, we expect to increase by 15% to 20% on a constant currency basis, reflecting the acquisitions in the FY26 year, and that includes both LADA and Cairo. And our effective tax rate, we expect to be around 27%. And then the key guidance considerations. The guidance includes completed acquisitions only, and that's obviously including LADA and chirodiagnostics. It excludes the potential PAMA fee cut, which could come in January 2026, although having been delayed now for, I think, five or six years, we expect it to be deferred again, if not cancelled. and no other regulatory changes are assumed, and we assume current interest rates will prevail. The next slide is on dividends, and the Board of SONIC has ratified a final dividend of 63 cents per share, which is on a par with the final dividend last year, and total dividends for the year will be $1.07 per share, which is up 1% on the prior year. The final dividend will be franked to 35%, record date 4 September, payment date 18 September 2025. And regarding that final bullet point, we continue to stand behind our progressive dividend strategy into the future, and although the current dividend payout ratio is still relatively high, we expect the payment ratio to start coming down in line with our predicted strong earnings growth from here on. The next slide, which is six, is on capital management and this slide provides information on our capital management and it really highlights our strong balance sheet position. Our headroom stands at approximately $1.4 billion before the final dividend payment. And our debt cover ratios is approximately 2.1 times at the 30th of June mark. And it moves up to approximate our pre-pandemic average of about 2.4 with the LADA and Cairo Diagnostics acquisitions. And I'll just make the comment that this does not preclude future acquisitions going forward. I guess with no further acquisitions, the ratio will obviously move downwards as our earnings grow, but with synergistic, suitable acquisitions, it's possible that the ratio might spike above that 2.4 times line temporarily, as has occurred before, and I guess you can see that in the history of this chart, where we have spiked above that line temporarily associated with acquisitions. The next slide is our traditional pie chart showing our revenue split. And although the whole pie has grown, obviously with our revenue, it's just interesting to note a few points. We currently have nine segments in this pie. And we're now probably going to have to add a tenth, which is Poland, because we have a business operating in Poland now coming with the LADA acquisition, roughly $50 million Australian dollars in revenue. And given that New Zealand gets its own segment, we probably need to cater for a new country, which is Poland. Not sure how we'll sort this out, whether we just add a segment or combine a couple of segments. We'll I'll have to work that out in the future. But looking at the existing pie and looking at our six largest divisions, we have three divisions now which are in the range of around $2 billion in revenue. That's USA, Australia and Germany. And we have three divisions which are in the ballpark of about a billion Australian dollars in revenue. That's Switzerland, UK and radiology. But with the LADA acquisition, Germany has essentially broken away from the PAC and next time round, this pie chart will show Germany as our clear number one division in terms of revenues. And, you know, just to nail that, Larder alone is going to add revenue somewhere between $650 and $700 million Australian dollars per annum to Germany's revenue. That excludes any other acquisitions or organic growth. Okay, moving on to our country slides, firstly the USA. So our statutory growth in the USA was negative 2% and that was impacted by the sale of the West Division in the second half of FY2024. Organic growth came in at minus 1% on a constant currency basis. Our organic growth has been affected by the loss of a payer contract in Alabama and also the disruption caused by the change healthcare cyber attack which we can talk about in question time if there's interest. We point out that our organic growth is stronger in clinical pathology than in anatomical pathology. And pleasingly, when we look at July's results, which are through, we're seeing a return to positive organic growth sitting at about 2.5%. We're very focused at the moment on strategies to drive revenue growth. and these include the recent gain of a new payer contract. This is a new contract for us in New Jersey with Horizon Blue Cross Blue Shield, and we're actually nearing completion with another payer contract, which is going to add potential revenue growth to our division as well. The other initiatives to drive revenue include things like restructuring our US sales force where we've combined our CP and AP, that's clinical pathology and anatomical pathology sales reps. We're driving digital dermatopathology sales using our pathology watch platform. We're extending the good growth of sales of our exclusive thyroid cancer test, ThyroSeq, We're pursuing hospital laboratory deals, and we're planning to take the chirodiagnostic test panels national, and I'll say a bit more about that just in a minute. And so, you know, there's a huge focus at the moment on lifting top-line growth in the U.S., From an operations point of view, the rollout of our digital pathology and particularly our pathology watch platform continues according to plan. The enhanced revenue collection system, that's the Zyphon platform rollout, is going to plan and we expect the majority of the benefits as flagged previously will flow through in FY2026. We've also rationalized our lab in the Midwest, which we have deemed to be subscale, and we've transferred just about all the testing from that lab to our Sunrise Medical Laboratories in New York, to their facility. Just a few words about the Cairo Diagnostics Acquisition. It settled only a few days ago, and this is a successful northeast-based lab It's located just north of Manhattan and it's actually near our CBL path laboratory. And it's a lab that's focused on esoteric and genetic tests for mainly blood cancers but also other cancers. Annual revenues of this business are approximately 35 million Australian and it's a business with relatively high margins. And as I mentioned, our strategy is not only to grow this business regionally in the northeast, but using Sonic's infrastructure to extend the service nationally. So just to explain this a bit further, ChiroDiagnostics is a specialist hemato-oncology lab, or they call it HemOnc in the jargon in the medical space. And it's a lab that provides essential high-end genetic and other testing for patients mainly who have leukemias and lymphomas. We're certainly excited about this partnership, not only because it adds a high-quality genetics lab to Sonic's stable, but also because we believe that there's a real opportunity to expand these services nationally. using our existing infrastructure, and by that I mean our collection centres, our couriers, our sales reps, and importantly, our pathologists. And the fact that we are strong in anatomical pathology throughout the US and deal with oncologists in that space will help us with that national rollout. Moving on to the next slide, which is Australian Pathology. This is a division that's performing very strongly. Organic revenue came in at 6%. Our earnings were enhanced in the year, not only by strong revenue growth, but also by tight cost management and a particular focus on our FTEs in the post-pandemic years. That tight control has continued. We're particularly proud to show strong organic growth in our genetic and other specialized testing. And I'll give a special shout out here to the success achieved by our sonic genetics team. Sonic genetics is a combination of DHM in Sydney and Sullivan-Nicolaides pathology in Brisbane. And in my opinion, Sonic Genetics is now the preeminent genetics testing institute in the whole of Australia, and I'm confident that it's going to serve Sonic very well long into the future, given the shift that's occurring in the medical lab space towards higher-valued tests, especially in the genetics space. So more generally, we're increasing the use of private billing for selected tests, and this includes tests which are not covered by the Medicare schedule, as well as tests which are covered in the Medicare schedule. Our labour costs remain tightly managed, even despite the fact that we're experiencing fairly strong volume growth. We were absolutely delighted to be selected to provide lab services for both North Shore Private Hospital in Sydney from July 2025 and Hollywood Private Hospital in Perth which will start in February 2026. These are both Ramsey Healthcare Hospitals and are both large. North Shore Private Hospital I believe has more than 300 beds and Hollywood Private I believe has more than 900 beds and is the largest private hospital in Australia. We're actually honoured to take over these contracts and our two involved labs, DHM in Sydney for North Shore Private and Clinipath in Perth for Hollywood are both equipped and already in Sydney but will do in Perth deliver outstanding lab services and add value to these fine RAMSI institutions where great service is provided to both patients and doctors. Also, in terms of contract wins, there was a lengthy government tender process for the National Bowel Cancer Screening Contract and we were very pleased to have won that again. This will be a long-term contract once again and after providing this outstanding service for so many years. We're very pleased to continue that service for the whole population of Australia. I think most of you know that annual indexation is going to be applied to around a third of the pathology Medicare schedule. The initial indexation of 2.4% commenced on 1 July of this year. And as we move forward, we continue to target the rationalisation of collection centres, and we have closed about 50 of these collection centres over the past year, and that strategy is showing great success, and we plan to continue with it going forward. Onto the next slide, Germany. another division that's performing really strongly. Statutory growth 10% in revenue, organic growth 4% on a constant currency basis. Our organic growth in the second half of FY 2025 was impacted by the change to the minimum KV quota for statutory insurance fees, that's the EBM schedule, which was effective 1 January 2025. that had an impact of approximately 1% annually across all our revenue. The specific EBM fee changes, which is different to the quota changes, which was also effective 1 January 2025, was net neutral for Sonic as we've flagged previously and as we expected it to be. At operations level, our German businesses continue to perform very strongly. We've had a number of successful laboratory mergers where we go three into one or two into one in both Hamburg and Munich, and these will provide synergy benefits and capacity for future growth. The LADA laboratory group acquisition settled on 1 July 2025, and there are already multiple integration and synergy work streams in train. The total revenue for this business exceeds $650 million. If you use today's exchange rates, it's a bit more than that. And we guide you again to the appendix, and this is a slide that we've put in there that we have previously presented at the half-year results release. In addition to LIDAR, there were two small synergistic acquisitions. They settled in October 24 and January 25. They've now been fully integrated. Total annual revenue of about 15 million Australian. The next slide on Switzerland. A lot's happening in Switzerland, as I think you all know. Statutory growth 21%, organic growth 4% on a constant currency basis. At operational level, we've now completed the rebranding of all four of the previously separate Swiss entities into one national integrated business that we're calling Sonic Swiss. We have a strong management team comprised of senior executives of all four of those entities. And just as a reminder, those entities were our original acquisition in Switzerland, Medica, based in Zurich, and then MediSupport, and then MediSyn, and finally the RISH Group. Our massive operational plan, which is concentrated on synergy capture from these acquisitions, is proceeding to plan, and it's really great to see the significant synergies that have begun coming through and which will peak in this current financial year, 2026, and FY2027. And, you know, amongst these synergies, we've integrated IT functions into one system, and that's pretty well complete, and that's going to allow for standardisation across the country, internal referrals, and other efficiencies which will flow. As far as physical lab mergers go, we've completed initial lab integrations in Geneva in clinical pathology and in Lausanne and Zurich in anatomical pathology. And there will be other lab and department mergers to follow in calendar 2026. So, you know, we're very pleased with the progress. This is a massive operation being led by an outstanding team. And really, it's wonderful, I'll just repeat again, to see synergies coming through which will be in the 2026 numbers. The next slide, UK. Revenue, 19% growth on a statutory basis. Organic growth, 14% on a constant currency basis. At operational level, the Hertfordshire and West Essex NHS contract commenced 1 March of this year. We're in the process of fitting out a hub lab in Watford, just north of London, not only to service the Hearts and West Essex contract, but also to create capacity for growth for our general business. And the building works in this fit-out are on track to complete by June of next year. Since 1 March this year, we've successfully commissioned two new stat labs in the Harts and West Essex group. And as part of the contract, we've taken on around 600 NHS staff. And just as a sidebar to that point, just a number, it's worth remembering that number if you're going to be looking at our total labour cost as a percentage of revenue for the whole company. So we've taken on 600 additional staff as part of that HWE contract. Your slide says we're currently documenting a new contract with Royal National Orthopaedic Hospital, but a newsflash is that overnight this has now settled and signed. So it is a small contract, but an indication of yet another NHS outsource contract one by our team in the UK. This is a London-based small orthopaedic hospital. And then moving outside of the NHS, we've secured a new contract to provide pathology services for one of the largest private specialist outpatient healthcare centres in the UK, and services for that will begin in October of this year. And then looking ahead, we're Obviously continuing to bid for new private and NHS contracts and I can say that the future growth prospects for our UK division look really bright. Next slide is Belgium, revenue growth 3% statutory, organic growth 2% at constant currency. Our FY 2025 growth was impacted by the fee cut which came in on 1 January 2024, but on the flip side our organic growth has been augmented by a 3% indexation of the national fee schedule which came in 1 January 2025, and the operations in Belgium are stable. Next slide is our radiology division, which continues to perform strongly. Revenue growth 10%, organic EBITDA growth 12%. At operations, our growth is particularly strong in the higher value modalities, and those include CT, MRI, and PET-CT. That trend appears to be continuing and will go on for many years to come. Unlike pathology, annual Medicare fee indexation applies to the whole fee schedule, the Medicare fee schedule, and a 2.4% increase was applied from 1 July 2025. We've opened seven Greenfield sites in the year in review, and we have another four planned for FY2026. The recently introduced change in Medicare MRI licensing regulations from July 2025 has been beneficial for us and is driving revenue growth, and the change has meant an additional 23 of our MRI scanners have now become fully funded. We are active participants in the National Lung Cancer Screening Program, which commenced July 2025, and we're already seeing strong growth from the early phases of this excellent program. And we continue to make prudent investments in AI and other systems to optimize our workflows and efficiencies going forward. Next slide, Sonic Clinical Services, revenue growth was 2% and at operational levels, I should probably say that as a general statement, the primary care market conditions are improving somewhat as a result of the recent increase in Medicare funding. In addition, we are seeing strong performance from our occupational health division, that's Sonic Health Plus, including the Australian Defence Force pre-recruitment contract, which is now going pretty well. And as a result of these, we're expecting improved performance in FY2026, driven by the fee changes and our internal cost management initiatives. During the year, we acquired the business of National Skin Cancer Clinics, which settled in April 2025. And just a little bit about this business, it has annual revenues of around 25 million Australian. And it gives us the opportunity for synergy capture from integration of NSCC into our existing skin cancer clinics, which are called ASCC, Australian Skin Cancer Clinics, And when you combine these two, NSCC and ASCC, Sonic is now Australia's leading provider of skin cancer clinics. The next slide on sustainability is a summary only of our sustainability progress and our external ratings as well. And I guess it's also to let you know that Sonic is making excellent progress in our ESG and sustainability endeavours and that full details of these will be published in the FY 2025 Sustainability Report which is due for release in November. And the final slide which summarises our positioning for the future. I have to say the company is well positioned for the future with significant competitive advantages. We have market leading brands and positions in our major countries. We are fortunate to have stable and experienced managers and doctors leading the organisation. Our balance sheet remains strong as we've demonstrated with the investment grade metrics. And we have our deeply embedded medical leadership culture, which provides unique market differentiation. And finally, for the year ahead, and as mentioned in this presentation, we are expecting strong EPS growth in FY2026. And I'm now going to hand you back to our operator to take your questions. Thank you very much.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and write your name to be announced. To withdraw your question, please press star 1 1 again. We will now take a first question from the line of Lynn Harrison from Bank of America. Please go ahead. Hylian, your line is open. Please ask your question. All right. As I'm not getting a response, we'll move to the next question. Our next question comes from Craig Wompan from RBC. Please ask your question, Craig.