Sonic Healthcare Limited

Good day and thank you for standing by. Welcome to the Sonic Healthcare FY2026 full year results 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dr. Jim Newcombe, Chief Executive Officer and Managing Director of Sonic Healthcare. Sir, please go ahead.

Good morning, everyone. Thank you for joining Sonic Healthcare's FY2026 full-year results presentation. On the call with me today are Sonic Healthcare's Chief Financial Officer, Chris Wilks, and Deputy Chief Financial Officer, Paul Alexander. We delivered solid financial results in FY2026, achieving our EBITDA guidance for the year on an underlying basis. Total revenue grew strongly, up 13% year on year to $10.867 billion, with strong EBITDA growth of 11% to $1.933 billion. Net profit after tax increased 17% to $621 million, with earnings per share up by 14% to $1.26. Operationally, we completed the acquisition of the LADR Group in Germany, further strengthening our position in that market, with synergy realisation well on track. In Switzerland, we continued substantial synergy capture from our recent acquisitions, which are also well on schedule. Across Sonic's portfolio, we achieved strong growth in advanced diagnostics, leveraging market-leading brands across multiple geographies, including our acquisition in the US this year of Cairo Diagnostics. We commenced an operating review of our US business which is laying strong foundations for improved financial performance. In addition, we completed the sale and leaseback of our Brisbane hub laboratory as part of our disciplined approach to capital management. All of these achievements were underpinned by our firm focus on growing earnings per share and improving return on invested capital. Sonic's investment proposition is clear. We deliver high value medicine at scale, which drives growth and financial performance. Our FY2026 results reinforce this proposition, something I've seen firsthand through my first nine months as CEO. Meeting our people across the globe and seeing our world leading operations platforms, I've gained an even greater appreciation for the unique competitive advantages and many more. Over four decades, Sonic has built one of the world's leading medical diagnostics networks spanning nine countries and 11 markets across pathology, radiology and primary care. We hold leading positions in all our markets, including the number one position in six. In FY2026, That scale translated into nearly $11 billion of revenue and $2 billion of earnings, but its impact extends well beyond strong financial results. Over the last year, our 47,000 employees supported 144 million patient consultations across more than 3,000 access points. Each consultation represents a moment when a patient and their doctor rely on us for an answer they can trust. That trust has been earned over decades and lies at the heart of our medical leadership culture, our second key differentiator. Medical leadership is a unique operating model that places the delivery of highest quality medicine and patient care at the heart of everything we do. We attract industry leading experts, maintain the highest standards of medical excellence, and build deep, trusted relationships with referring doctors. Those relationships create a powerful, self-reinforcing value cycle, driving organic growth and market share gains, which in turn translate into financial value for shareholders and enable us to successfully reinvest in our people, platforms and innovation. The power of medical leadership was evident in our FY2026 results. Our organic revenue grew 5%, continuing our long-standing track record of strong organic growth. Advanced Diagnostics was a particular highlight, with Sonic Genetics in Australia and Biovis in Germany delivering year-on-year growth of 15% and 12% respectively. Specialist referrals in Australian pathology continued to outperform, growing 7% year-on-year. And we built strong momentum in the expanding direct-to-consumer testing market, with our MIND direct-to-labor business in Germany growing more than 60% year-on-year. Our third competitive differentiator is operational excellence, enabled by the capabilities and infrastructure we have built at scale. By combining industry leading expertise, highly personalised specialty testing and proprietary information systems, we consistently deliver high quality patient outcomes. These capabilities are supported by sophisticated logistics management and an advanced global procurement platform, driving further productivity and operating efficiencies across the business. With these key differentiators as our foundation, we are focused on investing for the future. In FY2026, we launched a major initiative to modernise our global digital infrastructure. This company-wide transformation represents a step change in our ability to deliver better outcomes for doctors, patients and shareholders in an increasingly digital world. We are implementing this initiative across all three components of our tech platform. In our back office functions, we are migrating our finance, supply chain, and HR platforms to cloud-based systems, enabling greater standardization and scale efficiencies. This project was initiated in FY2026 with approximately $30 million of investment planned per annum over the next three years. Operationally, we are optimizing our specialist laboratory and radiology information systems, enabling more efficient, higher throughput laboratory and radiology workflows. And at the clinical frontline, we are scaling a suite of leading edge AI enabled solutions, including proprietary patient and doctor applications that improve access to care and enhance productivity. Combined, these investments create an interconnected, scalable platform Let me now turn to the performance of our markets and the key initiatives to drive revenue and earnings growth in FY2027 and beyond. Across the group, revenue performance was strong, reflecting the strength of our competitive differentiation and industry tailwinds. including ageing populations, the rising prevalence of chronic disease and the growing shift towards personalised preventative medicine. Over multiple decades we have built unmatched trust and goodwill with doctors and patients who in ever larger numbers choose Sonic for our high value medical services. We translated strong revenue growth into healthy margins across our markets. Specifically, Germany, excluding the LADR acquisition, Switzerland and Sonic Clinical Services delivered strong EBITDA margin expansion, demonstrating operating leverage from organic growth, ongoing synergy realisation and disciplined cost management. In Australian pathology and Belgium, we maintained healthy margins despite fee changes, supported by strong organic growth and revenue diversification, including private billing initiatives. Margin performance in the US, UK and radiology was affected by market-specific factors and multiple initiatives are entrained to improve performance in FY2027 and beyond. In Germany, Sonic achieved revenue growth of 43% with organic growth of 5%. We grew strongly in advanced diagnostics including genetics, specialised biochemistry and personalised precision medicine. We are leveraging SONIC's national infrastructure, trusted medical expertise and extensive laboratory network to capture growth in the fast-growing direct-to-consumer market. On the regulatory front, we are closely monitoring the proposed reform of the GOA private fee schedule. There is currently no clarity on whether the reform will proceed, nor its potential timing or impact, although it appears highly unlikely to take effect before calendar year 2028. While a wide range of potential mitigation strategies are under consideration, it is premature to provide any guidance on potential impact at this stage. In the meantime we continue to advocate against the proposed reform while pursuing opportunities for further cost efficiencies. At the beginning of this new financial year, we realigned our management and operational structure to accelerate synergy capture and efficiencies through consolidation, bringing 11 Federation members into three unified operating divisions. Finally, we are delivering significant synergies from our LADR acquisition well on schedule. We captured more than 40% of total synergies in the first year, with the balance to be realised over the next two. Key milestones included the migration to Sonic procurement contracts, the completion of two laboratory mergers in Berlin and Oldenburg, and the insourcing of LADR's external referrals into Sonic's specialty laboratories. We are realising synergies from the expansion of LADR's market-leading medical consumables trading and logistics business to Sonic's referrers. In addition, we completed extensive integration across shared services, including sales, logistics, Technical Maintenance Services, IT, and Financial Systems. In Australian pathology, we delivered strong 5% organic revenue growth, driven by specialist referrals and private billing for selected tests. We benefited from the 2.4% annual indexation applied to 30% of Medicare schedule fees in FY2026, with a further 2.6% indexation in effect for FY2027. In the hospital segment, North Shore Private Hospital and Hollywood Private Hospital contracts commenced in July 2025 and February 2026 respectively, further contributing to increased specialist referrals. We also continued to implement private billing for selected tests. A highlight during the year was the completion of a national laboratory platform procurement process, driving further efficiency gains, including for the cutting edge Docklands Laboratory The Fair Work Commission gender undervaluation review resulted in wage increases for phlebotomists and health professionals with an estimated FY2027 cost impact of $4.2 million respectively. Our industry association is in good faith discussions with the Department of Health on offsetting funding options. In the meantime, We are maintaining strong cost discipline through initiatives such as the rightsizing of our collection center network to improve productivity and deliver lease cost savings. Our US business delivered stable underlying revenue performance in FY2026 with 2% organic growth after adjusting for the loss of a major Alabama payer contract and the restructuring of anatomical pathology operations. We are firmly focused on improving our financial performance through the previously announced US operating review. This review is ongoing and is already delivering tangible benefits. At the same time, we achieved accelerated growth in advanced diagnostics. We delivered strong organic growth of 16% driven by the nationalisation of the division, which combines chiro-diagnostics, thyro-seq and other highly specialised testing. We also continue to improve underlying operational efficiency. More than 70% of Dermatopathology volumes are now processed through our proprietary, world-leading Pathology Watch digital pathology platform. This platform enhances workflow efficiency while expanding our ability to serve referring specialists across a broader geographic footprint. In addition, our enhanced revenue collection system is delivering results with cash collections trending positively. The decision on PAMA fee cuts scheduled for 1 January 2027 remains uncertain, although there continues to be positive dialogue regarding potential alternative legislation. The US Operating Review is delivering substantial results and continues to ramp up into FY2027. During FY2026 we rationalised nine anatomical pathology practices, improving profitability through laboratory closures and test portfolio optimisation. We secured procurement savings across a range of non-clinical spend categories and implemented a 10% reduction in corporate headcount across centralised support functions as part of a broader efficiency program. Building on this momentum, several initiatives remain in progress, including the optimisation of external reference testing and the centralisation of corporate functions, including compliance, legal, HR and marketing. Combined, these initiatives are expected to add $25 to $30 million to FY2027 earnings. We are also actively considering further initiatives as part of our ongoing operating review to improve financial performance. Our market leading national network in Switzerland achieved strong organic growth of 4% in constant currency, accelerating to 6% in the second half. This translated into strong margin expansion supported by significant synergies realized from the integration of the SynLab Suisse and Dr. Rich acquisitions. In FY2026, we completed four laboratory mergers across Geneva, Lausanne, Zurich and Ticino, with the two largest mergers in our pipeline in Bern and Lucerne on track for completion in FY2027. We launched further optimization initiatives during the year, including in procurement, logistics, sales, IT harmonization, and insourcing of external reference testing. Regulatory changes, which took effect from 1 July 2026, are expected to have an estimated 20 million Swiss franc impact on FY2027 revenue, equating to approximately 3% of revenue as a result of fee reductions for 10 high volume tests. We have put in place initiatives across our operations to mitigate this impact. The UK delivered revenue growth of 17% supported by the first full year contribution from the Hertfordshire and West Essex, or HWE, NHS contract. As noted earlier, margin performance in the UK was impacted by market specific factors. One factor was the extended integration timeline for the HWE contract. Our cutting edge Watford Hub laboratory was completed and ready for go live as planned during this year. The transfer of testing volumes associated with the HWE contract has progressed more slowly than anticipated due to operational issues within the NHS. As a result, we now expect to achieve the planned margins for the contract by H2 FY2028. Looking ahead, the Watford laboratory is well positioned to support the strong growth we are seeing in community based diagnostics across the region. Margin performance was also impacted by higher labour costs associated with the introduction of a new pay framework in the second half of the year. This cost increase will annualise in FY2027. We continue to strengthen our long-term strategic position in the UK in other areas, including through the acquisition of cellular pathology services, expanding our capabilities in the attractive and growing private anatomical pathology market. More broadly, We have multiple promising opportunities in the pipeline to serve the growing private pathology market in the UK. Radiology delivered strong organic revenue growth of 7% and underlying EBITDA growth of 5%. Growth was supported by continued increased demand for higher value modalities, including CT, MRI and PET-CT, as well as annual Medicare indexation of 2.4% for FY2026. Margin performance was impacted by our investment in 10 greenfield sites over the last two years, which lay the foundation for future growth. These sites remain in their ramp-up phase and are expected to become accretive approximately 18 months after opening. Changes to the Department of Veterans Affairs referral guidelines affecting MRI volumes also impacted margin, but are now fully annualised. We are focused on driving margin improvement through organic growth, cost discipline, and productivity gains from the continued deployment of AI-enabled tools. As part of our digital transformation initiatives to optimize our radiology workflows, we are evaluating new system options to replace our existing radiology information system, which is now considered end of life. Finally, Sonic Clinical Services delivered revenue growth of 5% with organic growth strengthening in the second half. EBITDA increased 25% year-on-year off a low base with significant margin expansion. Our performance in the second half was supported by a 3.2% increase half-on-half in GP consultations per working day following the introduction of the bulk billing practice incentive program on 1 November 2025. Our skin health business continued to deliver strong financial performance supported by its highly personalized approach to patient care. We realigned our operational and management structures to promote shared services and other efficiencies across the medical centre, occupational health and skin health businesses. This, combined with ongoing cost-saving initiatives, contributed to EBITDA growth during the year, with more improvements expected in FY2027. Before I hand over to Chris, I would like to personally thank our management teams and all of our 47,000 people around the world. Our people's deep commitment to caring for our communities through high value medicine is the beating heart of Sonic Healthcare's success. It is our people who have delivered a strong performance in FY2026 and who will continue to do so into the future. Looking ahead, I'm confident in the momentum we are building across the business and excited by the opportunities ahead. I am positive that the initiatives underway across the business successfully build on our sound foundations of scale and diversification, an exceptional medical leadership culture and unparalleled operational excellence. We are positioned to deliver strong long-term growth, profitability and value creation for shareholders. I'll hand over now to Chris to discuss the financial results in more detail.

Thank you Jim and good morning everyone. I'd like to now move to slide 23 where we have some more detail on the financial results. As Jim has already stated, FY26 was a solid financial result for Sonic and in line with the guidance we set back in August 2025. Total revenue for the year increased by 13% to $10.867 billion. On an underlying basis, adjusted for net non-recurring items of $51 million, which I'll discuss in more detail shortly, EBITDA for FY26 was $1.933 billion 11% higher than FY25. On a constant currency basis EBITDA was $1.916 billion and within our guidance range for the year. Net profit for the year was $621 million up 17% while earnings per share grew 14% to $1.26. As you can see on the right hand side of the slide depreciation expense was $771 million Interest expense was $188 million, approximately 19% higher than the previous year, largely a consequence of the funding of the LADR acquisition in Germany and the Cairo acquisition in the US, and also the purchase of two laboratory properties. The underlying effective tax rate for the year was 26%, a bit lower than the 27% we had guided. Property plant and equipment capex in FY2026 totaled $631 million. This was higher than normal owing to $280 million in strategic property investments. These included the acquisition and ongoing fit out of the Melbourne Laboratory in Docklands as well as of 16 Giffnock Avenue, Macquarie Park which expands our existing site at 14 Giffnock Avenue. Maintenance capex was $351 million or approximately 3% of revenue. We expect property related capex to be lower in FY27 and drop away from FY28 onwards as these major Australian projects and the lab infrastructure in Switzerland and the UK are completed. On slide 24 we have more detail on the non-recurring items we have excluded from our underlying results. The most significant item was the $107 million gain from the sale and leaseback of our Brisbane hub laboratory which was completed in June 2026. This game was offset by a number of items which also have their own tax impacts as set out in the table. We've written down 33 million Australian dollars in US debtors relating to the 2024 Change Healthcare cyber attack for revenue which was recognised in FY 2024 and 2025. As we have mentioned in previous disclosures, this was a very disruptive event for us and this is the net financial effect of it. There was a $14 million wage adjustment relating to the interpretation of an Australian shift worker award dating back six years prior to FY26, which was identified through an internal review. We've impaired $83 million in software intangibles, which is part of our digital and AI transformation initiative. This mainly relates to our radiology information system and legacy ERP systems, which, as Jim has mentioned earlier, are considered end of life. We incurred $8 million in acquisition costs relating to the Larder acquisition in Germany and the Cairo acquisition in the US. There was $14 million in restructuring costs related to US anatomical pathology business and facility rationalisation in Germany and in the sonic clinical service business in Australia. We made an initial $6 million investment in the implementation of finance, supply chain and HR systems as part of our digital and AI transformation initiative. We've also taken the decision to adjust for an interest deduction we're expecting in Germany relating to FY 2017-19. This was triggered by a recent German court decision against another taxpayer. The net impact on the EBITDA of these non-recurring items was an adjustment of approximately $51 million in FY 2026. Turning to capital management on slide 25, our priorities remain unchanged. First, maintaining an investment-grade balance sheet is considered fundamental. Second, we are maintaining a progressive dividend and expect the medium-term payout ratio to return to 70% to 80% of net profit as our profits grow. Third, pursuing strategic, selective and synergistic acquisitions, which has been an important part of our history and remains a priority going forward. And finally, We will consider share buybacks using surplus funds subject to market conditions and other factors. Moving to slide 26, our credit metrics remain in line with historical levels. We ended the year with a debt cover ratio of 2.2. The increase in net debt versus prior year relates to the acquisition of LADR and chirodiagnostics completed during the year, offset to some extent by the final leaseback of our Bowen Hills lab which settled in June. As at 30 June 2026 we had approximately 1.6 billion of available headroom. This was however before the final dividend payment. I note that we have recently entered into a new 245 million euro bank debt facility that will effectively refinance the USPP debt we have maturing in November this year. On to slide 27 we are pleased to announce a final dividend of 63 cents per share taking the full year dividend to $1.08 and increase of one cent on FY 2025. This dividend will be franked to 60% with a record date of the 3rd of September and a payment date of the 17th of September. Whilst the payout ratio is relatively high this year, it is well supported by a strong operating cash flow investment grade balance sheet. Turning to slide 28, where we have set out some of our recent property transactions, which are important operationally, but also for capital management. We remain focused on optimising returns on capital tied up in owned real estate, beginning with the sale and leaseback of our Bowen Hills Laboratory, which was completed in June for $445 million. The transaction enabled us to release capital and an effective pre-tax cost of 5.6%, while also crystallising value that was not reflected on our balance sheet. We also signed a conditional contract for the sale of our surplus property at 95 Epping Road, Macquarie Park, which has been re-zoned for a multi-storey residential development. Together these transactions demonstrate our disciplined approach to capital management and our ongoing focus on improving returns on invested capital. Looking ahead on slide 29, we're evaluating additional property sale and leaseback opportunities including our Melbourne Pathology Laboratory development in Docklands and our Macquarie Park Laboratory at 14 and 16 Giffnock Avenue. The latter property was acquired during the second half of the year for approximately $75 million to expand our laboratory footprint and support our long-term growth in this important market. Moving now to our FY2027 outlook and guidance on slides 30 and 31. We believe the fundamental growth drivers that underpinned our performance in FY26 will continue into FY27 and beyond. We expect strong organic growth across our key markets, supported by favourable healthcare demand trends and Sonic's key differentiators of scale and diversification, medical leadership and operational excellence. We also see significant opportunities to accelerate growth in advanced diagnostics and emerging channels, including direct to consumer testing. While these underlying drivers remain positive, we have some headwinds with regulatory changes in Switzerland and the extended integration timeline associated with the UK NHS outsource contract that are expected to impact EBITDA growth in FY27. Our focus remains firmly on the execution of our proven strategies in FY27 to help mitigate these margin impacts. These include continuing to deliver cost efficiency through our ongoing operating review in the US, Capturing the benefits and synergies from our Swiss and German acquisitions and executing on operational efficiency initiatives across procurement, automation and clinical AI. Now for our FY2027 guidance. On a constant currency basis, we expect EBITDA to be within the range of $1.95 billion to $2.03 billion. This excludes the back office IT transformation costs of approximately $30 million, as Jim mentioned earlier. Depreciation expense is forecast to be in the range of $810 to $825 million. Amortization expense is forecast to be lower in FY27 within the range of $90 to $95 million. Interest expense is expected to increase by 6% versus FY26. And our effective tax rate is expected to be approximately 27%. This guidance excludes any gains from the sale of properties, includes only completed Thank you for joining us today. Looking ahead, we remain well positioned for continued growth, supported by industry tailwinds and the initiatives underway across the business to drive further efficiencies and improve returns on invested capital. We are confident in our outlook and in Sonic's ability to deliver earnings growth and long-term value for shareholders. We will now open the call for questions.