Sonic Healthcare Ltd

Good day and thank you for standing by. Welcome to the Sonic Healthcare Financial Half Year and 31st December 2024 conference call. At this time, all participants are in the 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 redraw your question, please press dial 11 again. 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, sir.

Thank you, Amber, and good morning, ladies and gentlemen, and welcome to Sonic Healthcare's half-year result for the period ending 31 December 2024. I'm joined today by my long-standing colleagues, Chris Wilk, CFO of Sonic, Paul Alexander, Deputy CFO of Sonic Healthcare, and Diane Ayres, Senior Executive, Investor Relations and Financial Analysis. I trust you've got the presentation in front of you. And perhaps before we go to the deck itself, I'd like to just take a minute just to give you my view about the current company status and performance and how we see this result, particularly in the context of future performance of Sonic Healthcare. In many ways, this result reflects that Sonic has turned the corner in terms of our financials and that we're back on track following the massive disruption to the business over the pandemic and immediate post-pandemic periods. In the post-pandemic period today, and that's about two years, it's only two years, it's not even two years since the pandemic ended, there's been an incredible effort in Sonic from our leaders and all our staff worldwide to right-size the company. particularly in terms of labor cost, and that labor cost needed to be massively increased during the pandemic to respond to a huge operational, unprecedented as it was, operational call to perform millions and millions of COVID tests, as you all know. So it might have taken a bit longer to do this right-sizing than we or perhaps shareholders would have liked, but we're just about there right now. And if I could say that dialing down labor costs in a healthcare services company like Sonic needs to be done carefully and judiciously so that our services to patients and clinicians are maintained at first-rate levels and are not compromised in any way. And I'm actually pleased to say that our services have not been compromised and have remained outstanding at all times, which actually has been to the benefit of our reputation and standing worldwide. Unfortunately, we've experienced strong organic growth throughout these periods, and so combining strong organic growth with labor costs now at close to steady state level, we have operating leverage in the company once again, allowing us to deliver healthy EBITDA, net profit growth, earnings per share growth, and importantly, margin expansion once again. And we certainly do expect this to continue into future periods. And of course, finally, if you add to this the upside we expect from our recent M&A activity, particularly in Switzerland and Germany, it does feel like we're in clear air once again as we move ahead from here. Okay, so if I could take you to the deck, please, and we'll start with slide four where we give you our headline numbers. Sonics revenue for the half was at $4.669 billion, which is up 8%. EBITDA up 12% at $827 million, all in Australian dollars this is. Net profit up 17%. at 237 million, strong cash generation from operations at 620 million, which is up 37% on the prior period, and earnings per share growth at 15% at 49.2 cents per share. We confirm that we are on track to achieve the full year guidance that we issued in August of last year. And with 8% revenue growth overall, we're very pleased with the strong organic revenue growth of 6.1% for the half versus PCP. Our EBITDA margin was up 60 basis points in the period. And if you exclude the zero margin, initially zero margin acquisitions of the recent past, that's Dr. Rich Group and Pathology Watch, our EVA-DA margin expansion was actually 90 basis points up. And as I mentioned just before, we're now seeing the benefit of organic revenue growth and tight cost control, particularly at labor level, driving margin expansion, and we certainly expect that to go on from here. If you look at the numbers, you'll see that our labour cost as a percentage of revenue has reduced by 50 basis points, and whilst you might think that could perhaps have been higher, bear in mind that we are growing very strongly at the upper end of our testing, so the more complex higher value tests which are less automated but more profitable, and so that 50 basis point reduction in our labor cost as a percentage of revenue is very pleasing from our point of view. In terms of our acquisitions, all the Synergy initiatives are on track, but the majority of these benefits are yet to flow. We've had strong conversion of EBITDA to gross operating cash flow and we just reconfirm again that from 1 July we will be adding the acquisition of the LADA or Kramer Group acquisition which is going to add something in excess of 80 million Australian dollars per annum in EBITDA and that's based on the calendar 24 numbers So we expect that to be higher given that Kramer is growing at the present time. Slide five is a repeat essentially of our guidance as issued in August of last year. And I'll just call out the top line, which is EBITDA of $1.7 to $1.75 billion on a constant currency level. And I'll leave all the details. They're essentially unchanged from before. The board has declared a dividend of 44 cents for the interim period, which is up 2.3% on the same period last year. It will be unflanked with record date 6 March and payment date 20 March. And of course we provide our annual dividend history chart over there and we would like to continue with our progressive dividend strategy as that chart demonstrates. Our capital management on slide seven gives you the headline numbers, and I won't go through them all, other than to say that we have current headroom of 1.7 billion Australian dollars, but that's before the interim dividend and Kramer acquisition payments are made. And just for information that post-Kramer acquisition, we expect our debt cover ratio to still be below our long-term pre-pandemic average of around 2.4 times.

Okay.

We provide the pie chart on slide eight as usual. I think I mentioned at the last results or at the AGM that Switzerland has grown as a result of both organic growth but sizable acquisitions. And I'm going to flag that in a year's time, we're likely to see Germany hit the number one spot on this chart given that the Kramer acquisition will be added. So if we're adding something in the order of... More than $600 million in revenue, Aussie dollars per annum. This half will be an addition of $300 plus. which would be $1.2 billion, which will put it in the number one position, which is good news. And, of course, the whole pie is expanding with our organic growth as well, total revenue $4.669 billion for this half. The rest of the pie chart is very similar in terms of relativities from the previous one. Moving on to just quickly going through our divisional reports. First, the Australian pathology. The division is performing exceptionally well. Organic revenue growth of 9%, which is extraordinarily healthy, and we believe that to be... Better than market, even though I know many analysts are comparing this to Medicare numbers, which we find a little bit erratic in terms of timing, so we don't actually compare it directly. We look at market shares over a long period of time, which tends to smooth out any timing vagaries that come out of the Medicare billing system. In terms of operations, We are, just as I mentioned, worldwide, a huge effort has gone into cost control over the period, and that combined with strong revenue growth at organic level has given us margin expansion. We're growing particularly strongly in genetics, and we flagged this quite some time ago, and it really is a division that's taken off in a big way. So there are new tests coupled with strong demand for the tests that we offer. We're also introducing private billing wherever we can in a targeted way, and that is contributing to some extent to margin expansion. In addition to this, we have a project to rationalize wherever possible and wherever sensible our collection center network, which is large. And we have closed something like 60 collection centers over the past year. And these are done judiciously, and they're done... with profit in mind. So in a few cases, we might sacrifice a bit of revenue, but it will be to the benefit of the bottom line. The annual indexation of Medicare fees will commence 1 July to about 30% of the schedule and there are still discussions going on with government about the two item numbers or two tests that are proposed to be restricted going forward in line at the same time as the indexation takes place. We're not yet clear about the outcome of this, but we do not believe that the restrictions are going to be all that significant in Sonic's case. Slide 10, USA. Statutory growth was minus 2% for the half, largely due to the sale of the West Division, which took place in the second half of financial year 2024. Organic growth was 2% on a constant currency basis. which might be a little below market. It's difficult for us to get a clear understanding of what the market growth is. But when we look at our growth, we do believe that our anatomical pathology division is growing at slightly lower levels than expected. despite the fact that dermatopathology, which is skin pathology in Sonic USA, is growing very strongly, supported by the Pathology Watch rollout, our digital pathology platform, and we certainly expect that to continue. We're taking steps to address this, and one of the things that we have now completed is a complete... divisional restructure, where we combine anatomical pathology with clinical pathology, so that's everything except anatomical pathology, into regions under one management group, which should facilitate enhanced cross-selling of tests, but also reduce overhead costs and provide more attention to the anatomical pathology practices which we've acquired over the years. We've also mentioned previously the rollout of our enhanced revenue collection. And the majority of these benefits have not yet flowed through. It's taking a bit longer than we expected. And importantly, we've only just implemented the system into our largest division in the USA. That's our Texas operations, Texas and surrounding states operations. operation, the southwest of the USA. So we expect those to flow. There's usually a lag phase of something like six to nine months until the full benefits of this enhanced system come through. Moving on to Germany. very strong organic revenue growth at 7% on a constant currency basis with total revenue growth sitting at 12%. It's great to see our German division and the Australian lab division performing so strongly with similar drivers. So we call out in this particular slide our leading position in specialty testing, genetics, microbiome testing, and molecular pathology. These are all the sort of high-end tests that we do in the laboratory game, and we occupy leading positions in both countries, but especially in Germany. We're working extraordinarily hard on the synergy capture from our recent acquisitions, and purely in terms of lab mergers, two examples are Hamburg and Munich, and in Hamburg we have merged three labs into one, and Munich two labs into one, both providing efficiencies and also capacity for growth. But that's really just one side of it. There's many more areas where we capture synergy. Our anatomical pathology division is growing strongly. This is higher-end, higher-value work. In addition to that, we're progressing very well with the introduction of digital pathology and other benefits that will come to this growing anatomical pathology division, which we are leading in terms of rolling up in Germany. There's been a change to the statutory insurance fee schedule, the so-called EBM schedule, which was effective 1 January 2025, but the impact for us is neutral because there are Offsets against the fee quota reductions. So I won't go into the details, but there's flat fees on things like transport, pathologists, consumables, electronic order entry where there is counterbalancing upside for us making a net neutral effect from the EBM changes. There's also a reduction to the fee quotas, which is also effective 1 January 2025, which will have a minor impact on our EBM revenue, which represents about 35% of our total revenue, but that will be well and truly offset by the strong organic growth that we are achieving in Germany, so we do not expect that to be material in any way. and we just mentioned for the record two small synergistic acquisitions which were completed October 24 and January 25, total revenues of approximately 15 million Australian. We put in a special slide on slide 12 Just to give a little more information about the LADA or Kramer Group acquisition, which we announced on 9 December 2024, this transaction will complete 1 July 2025. It does represent a major milestone for Sonic. We've been in Germany 20 years, and this is, one of the big five labs. Sonic is one of those five, and we're acquiring another one, which is unprecedented in the history of the German lab sector. And so we're absolutely delighted that The Kramer Group has joined Sonic. We are culturally very, very similar. This is a family-owned business that goes back a long time, since it started just after the war. It's about 80 years old, and it has an incredible reputation in Germany alongside the great reputation of Sonic. And we were just delighted that Sonic The Kramer brothers, both pathologists who now are the big shareholders and who manage this big organization, chose Sonic Healthcare to join. So we give you the revenues there. Calendar 24, in Aussie dollars, over 600 million. EBITDA, over 80 million. And as I mentioned before, from 1 July 2025, when we take this over, those numbers will have increased. We also provide the enterprise values, and it's interesting that this is an acquisition where the sellers will take a mix of cash and shares, and almost half of the consideration will be taken in SonicShares, which very much indicates the confidence that the Kramer Brothers have, not just in the potential for synergy between our organizations in Germany, but also for the future progress of Sonic Healthcare globally. This deal will be immediately EPS accretive, and once synergies start channeling through, the return on investment will be significant, and we've put in there greater than 11%, which is well above our WAC. We provided the map there just to give you a sense of where Kramer operates in Germany, and if you have a look at the red dots, Those are the Kramer labs. You'll first of all notice that Kramer operates mainly in the northern half of Germany, with one or two exceptions. But then combined with Sonix labs around the country, which are the dark blue, those are the clinical pathology labs, you'll see that there are a number of sites where there is overlap and potential for synergy from lab mergers. But the synergies that we will get out of Kramer go well beyond mergers and work has already commenced on this even before we complete the deal so that we hit the ground running from 1 July of this year. And the areas where we will get synergy are things like procurement, specialty testing where we inter-refer, logistics, servicing of our equipment, and others. So there's a lot of areas and a lot of synergy that will take place, and it'll happen fairly quickly in this case. I mentioned also the reputation of the Kramer Group. They have 17 specialist practices, 19 hospital laboratories and about 3,800 staff and more than 170 pathologists to join Sonic Healthcare. If there was ever any question about who's the number one player in Germany, it's now clear. Sonic is well and truly the number one player in Germany, which I think is a great achievement for Sonic and for our German team. And it's a well done to them all. Just a side mention that the Kramer Group does include a small lab business in the southwestern part of Poland. This is a lab that's growing rapidly, and we will take our time to assess this lab. It could be an entry, a very, useful and appropriate entry into a country that we've been looking at for some time, but we leave all options open. It's small in the scheme of things, but this business is growing strongly and it's in an area where perhaps Sonic might wish to be going forward. Moving on to Switzerland. The statutory growth is 28%, but that includes recent acquisitions. Organic growth, 6% on constant currency, which is pretty good and healthy. We've mentioned before that we've restructured the management of Switzerland completely so that we make one national management team. We have a number of larger groups that we've acquired recently and that we've owned from before, and we're bringing this all together so that we can get the most efficient and effective operation possible. It's good news that both Simlabs Swiss and the Dr. Rich Group, these are recent acquisitions, are both now growing and showing early margin improvement, coming from a baseline of zero earnings margin. So there's not all that much in the half year, but we are confident that it's going to happen starting with H2 and then going into FY2026. There's a lot of work going on. It's huge. This is a major undertaking with an incredible team of managers, and things like procurement, courier logistics, corporate services, outsource testing. There's a whole range, and IT services as well, a whole range of synergy activities that are fully entrained as we speak, and we're very confident that they will come through. Excuse me. As one example, we've completed a laboratory integration in Geneva in clinical pathology and in Lausanne and Zurich in anatomical pathology, and this is just the beginning of what's to come in Switzerland. Moving on to slide 14, our UK division is performing exceptionally strongly, 10% growth, organic growth, 8%. The Hertfordshire and West Essex contract We'll commence 1 March 2025. This is a fantastic contract that we won. It's sizable, and it has stature for us in England, and we're very optimistic about how that's going to go, given our track record to date. We are in the process of fitting out a new hub lab in Watford, just northwest of London. It's about 30 kms. northwest of our current lab in central London, and that lab will be used to service this Hearts and West Essex contract, but also to provide excess capacity for us, and also disaster control so that we've got a second hub lab, which won't be quite as big as our lab on the Euston Road in London, which many of you have seen. We are expanding into anatomical pathology in the private market in the UK, and that's going extraordinarily well. This is a part of the lab... sector that we have not been in before in the UK and I think it's an area of growth for us going forward. We've also recently won a new 11-year contract with the Royal National Orthopaedic Hospital in London. This is a very prestigious, one of the world's great orthopaedic specialist hospitals and This is not a big deal. Sorry, I don't want to use that terminology. This is a smaller deal, but one that we're very proud to have won. And we look forward to servicing this hospital in the same way that we have the other NH hospitals that we provide services to. And we continue our pipeline of biddings for other NHS contracts and private work continues afoot. Just quickly in Belgium on slide 15, organic growth is minus 1% and statutory growth minus 3%. These are both impacted by the negative effect of the fee cut from 1 January 2024. netted off against indexation, which also happened on 1 January 2024. It was a net negative, which we have done very well to achieve minus 1% because the net negative was more than that. And so we are growing organically to offset this. And I guess the good news for us is that from 1 January this year, further indexation occurred of 3% without any fee cuts. And so looking ahead from here into H2 and FY2026, I think our growth is going to be positive, top and bottom line, which should be good. Our lab in Antwerp, a big lab, for many, many decades has been a center of excellence for cervical cancer, and it's essentially a reference laboratory for cervical cancer testing And so with Belgium switching to primary HPV testing, which Australia did back in 2017, I think, it's about eight years ago, our lab is very active now in that space making that change. Plus, we've introduced digital cytology for the pap smears that we do. Remember, with primary HPV testing, it's more... test, an HPV test, and the number of pap smears is only about 10 or 15%, something like that. So only the abnormal HPV tests get pap smears. We're also looking very much to grow into specialty diagnostics, things like microbiome testing, forensics, and genetics as well. Moving on to radiology division, the division is performing strongly. Organic revenue growth, 12%. 3.5%, which happened 1 July 2024. EVIT-DA growth of 13%, and you can see the leverage there, as small as it is in radiology, not as high as in pathology, but very pleasing margin expansion of 20 basis points. We're benefiting from... the trend to higher modalities and we have opened two greenfield sites in the first half of this financial year with six more to follow in H2 2025. We're also investing in AI and other solutions to optimize our workflows into the future and the division really sits in a very strong position going forward. Sonic Clinical Services, organic revenue growth was only 2% and earnings growth flat, and really this does reflect the rather challenging conditions that still apply in the primary care market with a general shortage of GPs. However, on the upside, our Australian Defence Force contract is ramping up, and that hasn't yet hit full speed, and I think that's going to be a very good contract for us well into the future, many years ahead. And finally, just a summary on the last slide, slide 18. As I mentioned before, we certainly expect ongoing strong organic revenue growth Really, this is still driven by our market-leading brands and our medical leadership culture. We've seen this now for many, many years, decades, in fact, and we're confident that that will continue. I also mentioned that with that strong organic revenue growth, plus tight cost control, we're getting leverage in the company again, which should drive margins. We're going to continue achieving synergies from our acquisitions, mainly Switzerland and Germany, and we've also added to that the implementation of the Ziphen billing system, The majority of those benefits haven't yet flown through. We call out the Hartfordshire and West Essex contract in the UK because this financial year it's actually losing us about $10 million Australian dollars and will become profitable in FY2026. So there's a sizable turnaround between 25 and 26 there. And I've mentioned the Kramer Group acquisition plus its synergies to follow. And we are achieving fee indexation in a number of our markets now. It's really good news that it's been introduced in Australian pathology, but we're also getting indexation in radiology in the UK, Belgium, and sonic clinical services. And, of course, we have a pipeline of potential opportunities as far as acquisitions and contracts go into the future. Thank you very much. I'm going to hand us all back to our moderator, Amber, to take your questions. Thank you for that.

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 wait for your name to be announced. To withdraw your question, please press star 1-1 again. We will now take our first question from the line of Andrew Goodsall from MST Markey. Please state your question, Andrew.

Good morning, and thanks very much for taking my question. Just in Germany, you're two months into the new regulatory changes. Just wondering if they're coming in line with your expectations there and whether LADA gives you sort of positive exposure to that.

Oh.

So LADA hasn't happened yet. That will only be from 1 July. When it happens, yeah, whether that...

I think, Andrew, it is similar to us. Colin mentioned that our EBM exposure, which is what this all relates to, is only about 35% of our revenue. I think it's not dissimilar for LADA. And look, it's too soon to... be able to tell we've done lots of modelling on the first change.

That'll be the same for LADA and Sonic. I think it's going to be identical, really. It's almost identical.

And our assessment of the quota, which is a bit more difficult to actually model, but we think it's kind of less than 1% effect on revenue. So well and truly, as Colin said in his presentation, swamped by growth rates.

So, yeah, no, it sounds like it's no surprises there. Just thinking with regulatory, I noticed last week the Australian government passed their Data Sharing Act, which the objective is to sort of stop duplication of testing. Just trying to get your thoughts on how you think that plays out.

Yes, Andrew, we have got very little information on that. I think it's got a long way to go. We're aware that the government wishes to do that, but there's really very little information available to us as to how that's going to happen and how that, you know, it's a major change to the way testing is ordered. It goes to clinical sovereignty. There's a whole lot of issues that have got to be addressed and there's a question mark as to how this is going to go down with the clinicians of Australia.

I think the feeling was that if the effect is, if there is less testing, it's probably more in the public health system where testing's done on the fly and if they've got access to it, so maybe it affects the public health system more than the private sector anyway if anything was to change.

And last one for me, just a quick one, Lada, any chance that sort of comes in earlier than July, or is that because you've got the full regulatory approval there, I think?

We do have antitrust approval in Germany and some of the other approvals that we need. There is an administrative process to go through, Andrew, related to the MVZs, the regulatory structure, the health care law there, and so that change will only happen from 1 July, so that is a locked-in date. It won't come forward. Okay, got it. Thank you very much.

Thanks. Thank you. Our next question now comes from the line of David Lowe from JP Morgan. Please ask your question, David.

Thank you very much. Thanks for taking my questions.

Colin, Chris, can we start with guidance? I mean, the strong first half, no change to the guidance, implies lower growth in the second half. Just wondering sort of what you think the major variables are that would put you at the top or the bottom end of the range and perhaps why you didn't talk about it being more likely to be towards the top, please.

Yes, Ant. I mean, David, we obviously can't say a whole lot more because we haven't issued any change to that guidance number, but I guess if you see a number... Colin, can I just stop you there?

Colin, every other company, when we talk to them about guidance, would tend to give us some sense as to what would put them at the top or the bottom of the range. I know you're sort of concerned about saying anything that hasn't been put in the presentation, but I think that sort of within the range, a bit of an understanding on that would be helpful, please.

Yeah, I mean, the way I look at it, it's a pretty tight range as it is, and the guidance we're giving is that range. Now, you know, if you look at the numbers as they are, yes, it could be trending to the higher end of that range, but, you know, at this point, we're not changing the guidance, so that's all we can really say. Now, if we... If there was some particular reason why we were confident that it was going to go over that range, then we'd say that. But it is pretty tight.

I mean, the variables, David, are all the normal ones, right? It's the level of organic growth. We've got the HWE contract coming on, which we expect to be loss-making in that last quarter. But maybe it's better than we expect. But that's what's built into the guidance, that $10 million loss. Obviously, in terms of comparing to the last year, in the second half of last year, we had the gain relating to the sale of the West Division in the US. So if you're comparing period on period, you sort of need to adjust for that. But it's the usual variables around growth more than anything, organic growth.

Okay, thank you. The other question I had, just on the US and the Zipin and the revenue recognition, could I get a little bit more detail as to, I think, Colin, you said that it hadn't delivered quite what you'd expected in this half. I see the comments on the beyond FY25. Perhaps give us a bit of an update on what did occur and what we should expect in this financial year and beyond, please.

So just so that you get a picture of this, we've implemented the system essentially from small to large in terms of divisions, and that's a prudent way of going through it. So we started off with small divisions, and what we found in the small divisions was positive response, positive result. The last ones to be implemented were our Northeast Division and the Mid-South Division, and finally the Southwest Division. So we've got the outcomes of the smaller divisions, and they're positive. The Northeast Division is showing positive, slightly less than the smaller ones. And it's too early to say yet for the Mid-South and definitely too early for the Southwest, which is our biggest division by a long way. And so I guess all we can say is that, yes, the benefits are coming through. This was a positive step for us, but it's taken a bit longer than we thought, and we think most of the benefits will flow through in FY26.

It's probably worth mentioning that I think in the final slide, Colin mentioned specifically what we're expecting in 2026. And that's because, as we've said, you're running two systems for a period of time where you've got the old debtors being run off the old system, the new systems ramping up. And so it is this lag of about six to nine months before you start to see the benefits flow through in cash and higher PPA price for accession.

Alright, if I could just squeeze in, I mean, just a quick follow-up. So, North East, which was bigger, wasn't as positive. Why? And why would you not be worried that other bigger divisions might not deliver as much?

because we think that the billing system in the Northeast was perhaps a bit better than elsewhere. It's hard to tell, and the benefits might still come through. This is not something that happens instantly where, you know, you'd understand the billing in the U.S. is complicated. And so it's possible that there's further benefit to come out of the Northeast. But it certainly doesn't detract from the numbers that we've given you. It was still pretty positive. It was just...

So far, the size of the prize is still, as we initially laid out, it's just a little slower coming than we were anticipating. All right. Thank you very much.

Thank you. Our next question comes from the line of Leanne Harrison from Bank of America. Please ask your question, Leanne.

Yeah, good morning all. I might stick with the United States. You mentioned there that organic growth was 2%. You know, some of your national peers reported their results and are showing growth about 5%, maybe a little bit more. Can you comment on what the challenges you're seeing in the United States market to, you know, the challenges in terms of trying to get your organic growth to move upwards from where you currently sit?

Yeah, so just a couple of points on this, Leanne. We're a little different from our major competitors in the sense that we have a much higher weighting to anatomical pathology than they do. So it's something like 30% of our revenue is anatomical pathology. Our big competitors are nowhere near that. And that's the sector that we think is... not growing as fast. Now, there's some reasons for that. The other thing is we have not done many hospital-related deals, which our big competitors have. And you probably know that... They include the hospital management contract fee as organic growth, and these are substantial numbers. And so the straight comparison between them and us is probably not quite equivalent. We're looking at this very closely. As I mentioned in the presentation, our skin pathology is growing very strongly. The non-skin anatomical pathology is growing less so and not to our satisfaction. We're putting a lot of attention into this. I mentioned the restructure of our geographies to assist this. I think eventually this is going to come right. Also, there's a lot of molecular testing that's now hanging off anatomical pathology, which we are pushing hard as well. And so we think that this will only be temporary. And so... It's very hard to actually tell what the market growth actually is. I know people look at our competitors and say, well, that's the market, and it may or may not be because we are quite different in the way we are structured.

Just to add that the 5% level that you quoted, that was really just their last quarter, the December quarter. If you looked at the half year, the average of the two of them would be in the low fours. So it's still a gap. I'm not denying there's a gap there, but it's not quite as wide as that last quarter might make you think.

Okay. And just to follow on in terms of the non-skin level, testing, probably not growing as quickly as you'd like. Is that a reflection of the market? And, you know, I know you say market growth is hard to measure, but how do you think you're going in anatomical testing compared to the markets?

It's very hard to tell. I was trying to get that point over. We have had instances of so-called insourcing, where clinicians, big groups of clinicians, decide to do their own anatomical pathology in-house. But that seems to have trailed off a bit. That might be affecting our numbers. We really do not have a good idea of what the market growth is in anatomical pathology, and I don't think there is a source that provides that. So I guess all we can do is look at our own growth, and we're going to be pushing the non-skin anatomical pathology as much as we can because we recognize that it needs a bit of attention. So, for example, and it's patchy. It's not quite the same everywhere around the United States. In Dallas, for example, our non-skin anatomical pathology is growing strongly. And perhaps I won't go into all the areas. In a few of the other areas, it's not. So it's... It's not a field effect that's happening here. It's probably a bit more regional.

Okay. And if I can put one more in, labor costs, you know, a fair bit of a cost out this half, so well done on that. But you did mention that there's still a little bit that needs to be done to get to a steady state. How should we think about that in the second half relative to what you've already achieved in the first half?

relates to the synergies that we need to get from the acquisitions that we've made. So obviously some of those synergies relate to labour costs. Very difficult to comment on the second half. For example, from 1 March we'll be adding something like 400 staff out of the NHS. push labour costs the other way. So, yeah, very difficult to be specific about one half in that way.

I guess it's worth saying that that's an area where if we keep a tight handle on labour and continue to grow at the 6% rate... a chunk of our margin expansion should come from that ratio of labour to revenue. So that's a big focus of our management.

In the end, just so you know, this is done at individual operating business level. Every CEO is tasked with growing margins and reducing costs, particularly labour. You know, it's a combined effort to drive top line and reduce labour cost in particular, especially from where we've come from the pandemic. And so, you know, I think there is still a little more room to go, but it's not uniform. Some of our businesses are doing exceptionally well. Others have a little bit more to go. And we're confident that they'll get there too, which will drive sonic wide margins further.

Okay, thank you very much. I'll leave it there. Thank you.

We'll now take the next question from Matthew Chouret from Citi. Please ask your question, Matthew.

Hi, good morning. Thanks for taking my question. Just one on the U.S. again. Do you have a sense as to why the growth is slower all of a sudden? Do you think it has anything to do with... Just a political environment or what do you think is the cause of the solar growth?

Look, I think a lot of people are asking that question. One of the answers that's come out is that people are actually seeing their physicians less for fear of co-payments. And that goes to the cost of living issue that applies, I guess, worldwide at the moment. And, you know... If that is the case, it's something we can't actually prove, but I've certainly read that in a number of places where people just are scared of getting an out-of-pocket copayment if they go and see their doctor. Now, that's probably going to reverse in time, but other than that, we're not aware of any specific reason as to why the whole market growth might be lower than normal.

Okay, and I was just keen to get your views on the trading so far in the second half.

Yeah, I guess we can say that these numbers and the maintenance of guidance is in an environment where we do have January numbers in, and I guess it's fair to say that they're in line with what we'd be expecting. So, yeah, hence we're maintaining our guidance. And I think anecdotally, Colin, the numbers in February are looking strong again. So things are looking okay coming into the second half.

Great. And then maybe just one for you, Chris, on the expected impact of FX in the second half.

You'll see by looking at our P&L numbers where we work on the average rate, there's not a lot of difference between our statutory numbers and our constant currency numbers, but there was a bit of a swing in December, which in turn changed things in the balance sheet a bit because that's taken at a point in time. So I think there is... It's a basket of currencies, so it's a bit hard to be specific, but as we stand, there's a bit of a tailwind for us into the second half of the year, but who knows what happens with rates from here. Great.

Thank you so much.

Thank you. Our next question comes from David Stanton from Jefferies. Please ask your question, David.

Thank you very much, and good morning, team. Thanks for taking my questions. So two quick ones from me. In terms of the uplift from billing that you've talked to in the U.S. around that U.S. 20 to U.S. 25 million in 2026, can I confirm that's at the EBITDA level, please?

Yeah, it is, yeah. Okay, thank you. It's a revenue upside that will flow us straight through.

And then second, can you give us your views on the potential for, in Germany, GOA reform or the private side reform given the upcoming elections that we're seeing in Germany? Thank you very much.

So as has been the case for the last 20 years, David, we're not expecting any significant change or any change really to GOA any time soon.

Understood. Thank you very much.

Thank you. Our next question comes from Saul Hudson from Baron Joey. Please go ahead, Saul.

Thanks. Yeah, good morning. Chris, maybe one for you. Could you comment on your expected capex for the year, just noting the first half was down quite significantly on the PCP?

Yes, well, there's been a fair focus on CapEx in the post-COVID world, and I guess the CapEx number bounced around a little bit with building projects, and we've had a bit of a runoff of building projects, but we... We think that we're getting back to a maintenance capex number that's more in line with the depreciation plus a bit for the growth. Now there is in the second half, I think you might be aware that we're in the process of building that. planning a build of a new lab facility for Melbourne Pathology down in Melbourne, so there's a chance that we settle on a property in June that might make the number look higher, but that's a kind of one-off. But the maintenance capex we think is in good shape and probably should be consistent with what you've just seen in the first half, which is down.

Thank you. And if I just ask a more general question about the U.S. So, I mean, we don't see profitability by country. I'm just wondering if you're comfortable with the return that that division is making in terms of return on invested capital. And does the U.S. remain an entity or a region where you are looking to continue to deploy capital in the form of M&A? Or is there any rethink about the medium to long-term opportunity in that country based on reimbursement and organic growth?

Yes, it's a fair question and, you know, obviously we keep reviewing that situation as we go forward. We've got a fairly sizable business in the US and it is the biggest market in the world and we've got a very good team in place. We're doing a huge range of operational things to try and... I guess, improve the performance of the business. And we remain optimistic, but of course we've got to keep an eye on the points that you raise. So I guess that's all we can really say at this point in time. We think that things are going to get better. Because, again, you know, in our game, if you've got fairly sluggish top-line growth, it's always a struggle. And so we're pushing at both top-line and, of course, cost control level as well, and we'll just keep pushing on and reviewing the situation as we go forward.

Okay, thank you.

Thank you. We will now take our next question from Steve Wynn from Jarden.

Please go ahead, Steve. Steve, please take your question.

Gone. Hello. Yeah, yeah, sorry. You'd think I'd learn to take that off by now. Yeah, just a question on your working capital cash flow. You've called out the stronger receivables. I'm just trying to just clarify whether or not that is anything to do with this collection system. So we are seeing some sign of that coming through your working capital or is that unrelated to that yet?

There'd be a small relationship there, but it's not the overall driver of those stronger collections.

Okay. Can you highlight where that is, and is that something that's sustainable?

So I'm not sure what else I can say, really.

Yes, I think that in some ways you can't keep reducing. The debtors are going to sit at a certain level, so it's probably not going to be possible to keep improving that, because obviously it takes a certain amount of time to collect your receivables. But you'll see in the balance sheet that the receivables did come down a bit in that period, and so that's a contribution to that strong cash generation.

Yeah. My second question was just if I could just get a comment on... the court case that is currently going on in the US with regards to the lab-developed tests and the oversight by the FDA. Just wondering what you think the outcome from that will be. And if it does come to pass where that rule that the FDA put in is allowed, what sort of cost... that puts on your business in terms of reporting to the FDA with regards to testing outcomes from a compliance perspective.

So, Steve, your question relates to lab-developed tests and the proposal that these become fully controlled by the FDA. Now, the court case is still running, and the latest is that there is no outcome yet, and you probably know that. The feeling is amongst industry players in the US is that this has got years and years to run if it ever gets to an outcome. I think there's a sense that even though some announcements suggesting the contrary might happen, with the new administration in the US and its efficiency drives, this would be something that would be far from acceptable given how complicated and the resources that are going to be required by the FDA is this gigantic. And so I think... If it continues, I think you're talking years and years before this can ever be implemented. Now, should it be implemented, we're going to be less affected than our big competitors. We do have some lab developed tests. Those tests that are approved in New York State will not be included in this whole initiative. And, for example, our ThyroSeq test, which is a really high-selling, specialised test, will not be included in this at all. And so, yes, we will have a few, but it's not going to be significant for us. It would be significant for the big players. But if I could make a comment for the whole industry, this would be a negative for healthcare progress... in the USA because lab-developed tests are a very safe and effective way of introducing very useful tests at a clinical level into the market. So most people are scratching their heads as to why this would have even been proposed in the first place.

Understood. Thanks, Colin. My last question is just with regards to the JV you have in the UK. Obviously, that's contributing to some pretty strong top-line growth. I'm just trying to sort of understand what sort of contribution that's making, particularly from the point of view of, I noticed the minority interest line, which I assume is related to this Joy Venture, has gone down. So would that just mean that this is loss-making?

That's gone up. It's gone up, Steve, quite a bit. And so that's a bit of a sign of the profit in that. I think it's gone from 15 to 18 or something in the period. So that's a sign of the fact that HSL is doing pretty well. Yeah, OK.

I misread the line there. So it is profitable, and so... Yeah, yeah. even though the HWE contract is not? HWE hasn't started yet.

The only reason HWE is not at this point is because it hasn't started and we're busy expensing the fit-out of the lab that will house this joint venture.

So there's some startup costs, which is the 10 million we've alluded to, which would be in the last quarter from 1 March, I think, the last four months. And we're hoping that might be less than that. But yeah, then all the new NHS contracts run through that joint venture. Okay, so FY26 could be the year that really starts to help some margins. from the margin on these contracts but need to recognise that sometimes NHS type contracts are not at our average margin level so even though they're good profit to the bottom line and low capex relatively then they can sometimes be a bit margin diluted. Okay, well understood. Thank you.

Thanks.

Thank you. Next question comes from the line of Craig Wong Pan from RBC. Please ask your question, Craig.

Great, thank you. Just wondering if you could make some comments about cost inflation, like what you're seeing at the moment and how that has compared to previous periods.

in one word Craig it's easing and so that's a big positive for us we're well and truly over the stresses of high inflation and the effect that it has not just on salaries but on our consumables and other costs as well it's eased dramatically and so just to kind of clarify is the exit rate that you're seeing at the end of the period is that sort of

or is that continuing to fall post that period?

When you say fall, there still is some inflation that does flow through into salaries, but we're back to kind of more the pre-pandemic environment where if you've got two plus percent increases in salaries but you're growing at six percent, then that's a nice position for us to be in. And that's kind of where we sit in. It varies by country, obviously. Inflation rates are different in different... But most of our geographies are kind of in the two-plus range. Two, three... In Australia, depending on which numbers you look at.

OK. And then on the Australian business, the Australian pathology business, the mention there of targeted private billing initiatives, could you just give some more details on how far progressed that is and how much benefit that had in the period?

So Craig, we don't want to go into too much detail on this because it's of a competitive nature in a sense, but we target very specific tests where It's acceptable to the market. I don't want to mention tests itself. I can say that tests that are not covered in the Medicare schedule are included in this group where we bill privately, and we do quite a lot of those because they are often the high-end tests, including a number of our genetic tests where there simply isn't a reimbursement for it. But in addition to the non-reimbursed tests, We are targeting specific tests where we believe it's justified and where it is safe to private bill. So we're prudent in the sense of obviously we don't want to lose any business while doing this. And it's slowly progressive, but it's heading in the right direction.

Okay, and then my last question, in the last, in the FY24 result, there was mention of sale and leaseback of properties. Just wondering if that's still something that might be considered or is that sort of off the table now?

No, no, it's still on the agenda. I guess it's a project that's kind of in train. I guess we're keeping a bit of an eye on what's happening with interest rates and the flow through from interest rates to cap rates. We're not going to necessarily pick the top of the market in that sense, but it's something that I suspect will happen over the next year or two and maybe progressively rather than sort of one big transaction.

Okay, thank you. That's all my questions. Thanks.

Thank you. Our next question comes from the line of Laura Sucley from UBS. Please ask your question, Laura.

Hello. Thank you for taking my questions. Could you just talk to your ability to sustain growth in radiology given some of the mixed benefit you're seeing there at the moment? It looks like some of these are probably longer-term trends that you can benefit from. And do you think you need to open any more centers than the eight that you alluded to earlier? Yeah.

Yeah, so, I mean, first of all, we believe the market continues to grow and there's an ongoing shift to the higher-end modalities, that's PET, MRI, CT, and so that will continue. The greenfield sites are nothing new for us, so we've opened up greenfield sites over... many years, and where it makes sense, we'll certainly continue to do that. I guess we're confident that growth will continue. We're obviously looking at a variety of digital solutions, teleradiology opportunities, and there is no reason why the growth should not continue in radiology. driven by a fairly strong market growth.

Okay, and then maybe a follow-up on that then. If I remember correctly, some of your partnered AI systems were going to be coming live towards the end of calendar 2024. Where are you with that and how is it going?

Are you talking about Franklin AI, the prostate AI product? Yeah, exactly. So it's being road tested right now at Douglas Annie Moyer Pathology. We hope that that final testing will be completed by the 30th of June, and then we'll give the market an update at that stage. It's an outstanding product. you know, which has taken a lot of diligent work to get to. And so now it's a matter of testing it with pathologists in the live setting and then working through towards commercialization of the product and implementing the product into Sonic and elsewhere, hopefully.

You were saying that in the radiology space we're continuing to roll out the Analyse products as well, so... that's all going well.

And then maybe one last one, if I can. Sorry if I just missed this, but the potential restrictions on use of some of these routine tests in Australia, what are the assumptions that go into your conclusion that impact would be zero or minimal? Is it just that they're low volume for you, or is there something else that goes into those assumptions?

Yes. Well, I wouldn't say they're absolute low volume, but there are specific issues around both of these tests that are planned to be restricted that are not clear yet to industry players. So, you know, it's not really appropriate to go into too much detail about this, Laura, but our view is, as I mentioned earlier,

All right, thank you. Thanks.

Thank you. Next question comes from the line of Andrew Payne from CLSA. Please go ahead, Andrew.

Yeah, morning. Thanks for taking my questions. Be good to just get an update on the progress of your Swiss acquisitions. Be good if you can get any insights on the ramp-up of these assets in terms of profitability and also if you think you can deliver similar margins in these business in comparison to the group.

Yeah, so without saying much more than we've got in the presentation, certainly is our aim to drive the margins of these businesses to those of our previously operating businesses, so close to 20% EBITDA margin. And it's just a matter of time. We've said to the market before that this is a two- to three-year project. There's a lot of work involved in this. We made those acquisitions after very careful due diligence and planning with the intention of lifting their margins from zero to our prevailing margins. So there's no reason to think that we're not making good progress because we are.

Okay, so I don't know if you can confirm this, but is it starting to contribute to profitability? And I guess is it part of the benefit of the EBITDA margin expansion that you saw?

Yes, it would only be a very small part of our overall margin expansion. But if we look at the individual businesses in Switzerland, which is becoming increasingly difficult to do because we are merging into one national operation with lots of synergies, transfers of work between labs. We're scrambling an egg, so to speak, but when we have tried to look at the margins and growth of, for example, SynLab Swiss, and that is growing and its margins are lifting. But as far as contributing to the whole of Sonic, minimal, close to zero at this stage.

Okay, that's great. And then just one on cost containment. Obviously, you do well on labor costs, but consumers were up versus PCP. Just be good if you can give us a bit more color on the drivers of this. I know you had commentary on genetic testing and test mix. How big a driver is that, and then how significant are the offsets in procurement?

If the procurement efforts continue, you're right that some of the effective, it's only 20 basis points as a percentage of revenue increase period on period. I don't believe really any of that relates to increases in the costs. It is a mixed thing, both the mix of tests but also the mix of geographies. In Europe or in Germany and Switzerland, for example, where we don't do collection of specimens, our medical supplies as a percentage of revenue is in the kind of early 20s as a percentage, whereas here in Australia where our revenues include costs related to collection, it's more in the mid-teens, and so the more we grow in Germany and Switzerland, that puts a little more pressure on that percentage of consumables ratio to revenue. We've got a bunch of programs underway here and in the US there are a couple of big ones that might affect a little bit the second half but certainly in the 26th we're confident of some chunky savings from existing contractual arrangements. So, yeah, we continue to run a worldwide procurement effort. We've actually just got a new global head of procurement who, for the first time, is going to be based in the US, a bit closer to perhaps the vendors. So we continue to work on that, but the percentage of revenue is affected by those two things, so you won't always see it just come down. Yeah, sure.

No, that's clear. Thanks for the colour. That's all I had.

Thank you.

I am showing no further questions, and with that, we conclude our conference call today.

Thank you for your participation. You may now disconnect.