Thank you for standing by, and welcome to the Integral Diagnostics IDX Half Year Results 2023. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Dr. Ian Kadish, CEO and MD. Please go ahead.
Thank you very much, Darci. My name is Ian Kadish. I am the Managing Director and Chief Executive Officer of Integral Diagnostics. I'm joined here this morning by Craig White, who is our Chief Financial Officer. Thank you all for joining our results call this morning. You may have noted that we brought the call forward because we were ready, we had a clean half year, and we had completed our auditor review.
From a consensus perspective, you'll see that we were slightly above for revenue. We were in line for EBITDA, and we were divergent below the operating earnings line at EBIT and NPAT. We've also called out, you'll note in the presentation, a revenue improvement in quarter two over quarter one and double-digit improvement over January last year. Turning to our second page, delivering on our values in the first half of financial year 2023.
Integral Diagnostics is a values-driven diagnostic imaging company. We served 590,000 patients last year and performed more than 1.2 million exams. We invested AUD 13.6 million in CapEx, including a PET/CT at Smith Street and MRI upgrade in Robina, both on the Gold Coast. A CT at Maraenui and a spec CT at Millennium, both in Auckland. We've continued to develop and to implement technology, including AI, to enhance the patient and the referrer experience. We employ 249 reporting radiologists across the group, and we continued the development in this half of our Integral Diagnostics IDXt business, our teleradiology business, reporting for external as well as internal clients. Everyone counts at Integral Diagnostics, all 1,984 employees.
We conduct regular temperature check and pulse surveys, including in the past six-month period, with our employees showing continual improvement in employee engagement. We've continued to focus on delivering our ESG strategy. With regard to creating value, we saw an operating net profit after tax decline by 36% to AUD 7.8 million in an environment that we're still recovering from the wide ramifications of COVID-19. We declared a first half FY 2023 fully franked interim dividend of two and a half cents a share. We've invested AUD 5.1 million in growth initiatives. We've continued the integration of The X-Ray Group that was acquired in November of 2021 and completed the acquisitions of Peloton Radiology and Horizon Radiology that were both acquired on the 1st of July 2022.
We currently have 6,632 shareholders as at the 31st of December. We've implemented new clinical and corporate IT systems in this half to better support the business and to facilitate workflows to help drive shareholder value. Turning to our financial highlights on the next page. We've grown our revenue by 19.2%, reflecting a slow gradual recovery in patient volumes and the acquisition of The X-Ray Group, Peloton Radiology and Horizon Radiology. We saw a 58.2% increase in statutory NPAT to AUD 16.1 million, a decline of 36.4% in operating NPAT to AUD 7.8 million. Driven by a write-back of AUD 8.3 million net of tax from one-off non-operating provisions, transaction and integration costs, amortization of customer contract and the like.
We increased our operating EBITDA slightly by 2.4% to AUD 39.8 million, also saw a decline of 48% in operating diluted earnings per share to AUD 0.033 per share, driven by the decreased NPAT and the increased number of shares on issue post the acquisitions. We improved our free cash flow by 56% over the period to AUD 38.5 million. Our net debt increased. Net debt to EBITDA ratio increased slightly to 3.1. It was a challenging first half result, it was driven by the slow gradual recovery of patient volumes. Further recovery is expected to drive positive operating leverage and improve profitability over time.
We received limited price increases with Medicare legislation of 1.6%, well below inflation, and no inflation adjustment from the Accident Compensation Corporation and the District Health Boards in New Zealand, and limited inflation indexation from the private health insurers in New Zealand. We implemented selective price increases in both Australia and New Zealand wherever possible while remaining market competitive. There were significant cost pressures in the first half, especially higher labor costs driven by inflation and supply shortages in the labor market, together with higher interest funding costs. Management are very focused on containing and reducing these costs wherever we can. Our operating EBITDA margin decreased by 300 basis points compared to the prior comparable period. 230 basis points relative to the full year, FY 2022.
Both acquisitions, Peloton and Horizon, have experienced very similar volume trends to the IDX existing businesses in Queensland and New Zealand respectively. We declared a fully franked interim dividend of AUD 0.025 a share, compared to AUD 0.04 in the prior comparable period. This represents 74.4% of our operating net profit after tax. Turning to the industry growth rate graph on the next page. You'll see that the industry growth rate on a 12-month rolling basis came back strongly in calendar year 2021, but declined significantly in calendar year 2022, given the onset of the Omicron variant of COVID-19, together with influenza and the lingering impact of these events.
In Australia, IDX recorded solid market share gains, evidenced by a 4.1% revenue increase in our organic business, same clinic growth, in comparison to Medicare benefits for the states in which we operate, which saw a 1.2% decrease in weighted average benefits paid for the first half 2023, adjusted for working days. Importantly, quarter-on-quarter, the 1st quarter saw a 2.0% growth. The second quarter saw a 6.2% growth, a significant increase. In January 2023, we recorded double-digit revenue growth.
Turning to the shareholder returns on the following page. We declared a fully franked dividend of AUD 0.025 a share. It represents a payout ratio of AUD 0.744 of operating NPAT. The dividend record date is the 3rd of March 2023, and the dividend will be paid on the 4th of April. We have a dividend reinvestment plan available for participation in the 1 HFY 2023 dividend. I'm gonna now hand over to Craig White to take us through the numbers in a bit more detail.
Good morning, everybody. Thanks for joining the call. I'm just turning to the detailed results for first half FY2023. As Ian mentioned, we saw a 19.2% revenue growth, reflecting the inclusion of the Peloton Radiology and Horizon Radiology acquisitions, as well as solid organic growth in the Australian business of 4.1%, and similarly in New Zealand. We did see some fairly significant EBITDA margin compression of 300 basis points, driven by the increase in particularly labor costs driven by inflation. We would expect that those margins revert to more normal levels around the 20% level as the volume recovery continues across the business.
In terms of free cash flow, we saw strong free cash flow in the first half relative to the prior corresponding period. Free cash flow conversion of just under 100% at 97%. Our leverage ended the half at 3.1x up from the prior corresponding period of 2.6x, essentially driven by the partially debt-funded acquisitions of Peloton Radiology and Horizon Radiology. We would expect that leverage number to trend back down towards target leverage around 2.5x over time. Just turning to the next page to talk to revenue in a little bit more detail.
You can see there broken down is the contribution from each of The X-Ray Group, the additional four months from July through to October, for Peloton Radiology and Horizon Radiology for the, for the first half, both those acquisitions completing on the 1st of July. You can see that in terms of our organic revenue growth in Australia of 4.1%, there's a definite trend, an improving trend over time, where we saw in Q1 2% weighted at growth in the first quarter, 6.2% weighted growth in the second quarter, and in January, we saw double-digit growth. Certainly an improving trend, and well above the Medicare industry weighted average, 1.2% decrease in benefits for the same period.
We also saw our average fees per exam increase by 5.2% in Australia, reflecting an ongoing trend towards the higher-end modalities of CT, MRI, and PET. And New Zealand, as I mentioned, also contributed 4.1% growth in organic revenues. Turning to operating expenditure, we certainly felt the impact of inflation, particularly on labor costs, in the first half. We saw a lift in our operating expenses as a percent of revenue, 3.1%, including acquisitions. As I said, we would expect that over time, as we continue to see a recovery in patient volumes, the impact of price increases and ongoing improvements in modality mix, that we would see operating expenses come down to more normal levels as a percent of revenue.
Important to just point out that as far as occupancy costs and other costs go, we did reclassify telecommunication expense of about AUD 1 million between those lines. They moved from occupancy costs into other costs to just simply reflect a more appropriate categorization of those costs. Finally, in terms of our interest expense, that did increase given we debt funded the acquisitions of Peloton Radiology and Horizon Radiology, and we saw interest expense on borrowings lift to AUD 5.8 million in the first half of FY2023. That is up on FY2022. I should just point out that that FY2022 comparative number is the full finance cost for FY2022. Within that, the actual interest expense was AUD 3 million. three would compare to the 5.8.
Just turning to capital management. As I mentioned, we have leverage sitting at 3.1 times at 31 December, but it's expected to trend back down over the course of the second half. We have significant liquidity headroom available under our facilities. You can see that cash decreased at 31 December from the 30 June balance, given that we closed the acquisitions of Peloton Radiology and Horizon Radiology on the 1st of July. You'll also note that the current tax receivable reflects our tax installments paid on FY2022 earnings, and we are due a refund of about AUD 5.6 million, which we would expect ordinarily to receive this month. You'll also note that the contingent consideration provisions have decreased significantly.
Effectively, they represent the write back of provisions relating primarily to Imaging Queensland, but also to The X-Ray Group, totaling AUD 14.1 million. That's offset partially by the inclusion of the earn-out provisions for Peloton Radiology and Horizon Radiology. Turning to cash flow and cash conversion. As I've mentioned before, we've seen strong free cash flow in first half of FY2023, with cash conversion at just under 100%, 97%. You can see that from a CapEx point of view, we had growth CapEx of about AUD 5.1 million in the first half of FY2023. Just turning to capital expenditure. Total CapEx over the half was AUD 13.6 million, split between AUD 8.5 million replacement CapEx, AUD 5.1 million growth.
Most of that growth CapEx was enhancement of equipment in existing sites. Obviously targeted improving services to patients in those sites. Depreciation for the half sat at AUD 12.1 million. That excludes the AASB 16 adjustment for right of used assets. I'll now hand back to Ian just to talk to the regulatory update.
Thank you very much, Craig. On the 1st November 2022, the federal government deregulated MRI services in regional and rural areas, defined as the Modified Monash Model, areas 2 to 7. Importantly, three more MRIs. We now have three more MRIs in these regional areas that have a full Medicare license. I'll draw your attention to the table in the appendix of this investor presentation, where we list the number of licensed MRIs we have in the regional areas, MM 2 to MM 7. The other Medicare changes that were introduced over the period, including the indexation of 1.6% that we spoke about.
The bulk billing reduction on MRIs reduced to 95% of the MBS from 100% from the 1st of July, only affecting MRI services that were currently being bulk billed to Medicare and did not have a material impact. Importantly for us, from 1 July 2022, two new PET items were introduced for patients with prostate cancer. These items allow for the initial staging of intermediate to high-risk patients with prostate cancer, and it's important because the addressable market of prostate cancer is large, and it's a meaningful reimbursement. In New Zealand, there was limited indexation of pricing in New Zealand, and the emerging practice of non-arm's length referrals continued in New Zealand over the period.
We are developing our referrer base in New Zealand to include more of the general practitioner market, especially on the back of the Horizon acquisition and on the back of market development activities that we've undertaken in the area. The GP market is less impacted by non-arm's length referrals, and by encouraging GPs to work patients up themselves prior to the referral to the surgeons. Allows the GP to order the tests, including the MRI, and have the patient fully worked up before the patient presents to the surgery, where the decision for surgery can go ahead without the need for additional scanning. Because the scans would already have been done and ordered by the GP. Moving to our management strategy on the next page. Good medicine is still good business.
Consistent with our values that patients are at the heart of everything we do, the company has remained committed to maintaining our workforce and infrastructure to ensure that we're well-positioned to service patients as demand increases. Underlying fundamentals of the radiology industry remain strong. We're confident that patient volumes and historical growth patterns will over time return to the pre-COVID-19 levels.
Our focus in financial year 2023 is to continue working on building our organic growth, sweating our assets more, integrating our recent strategic acquisitions, and actioning select brownfield and greenfield opportunities. In the absence of unforeseen extraordinary circumstances, the second half of FY 2023 is expected to be materially stronger than the first half. Our replacement and growth CapEx for financial 2023 is expected to total between AUD 30 million-AUD 35 million. Turning to the last page of the presentation.
Our focus areas in FY20 23 are to drive organic growth through improved utilization of our existing assets through selected price increases, cost efficiencies and selected brownfield and greenfield sites. We have a strong focus to build and enhance our relationship with our referrers. We're pricing now to better reflect the value that we deliver while remaining competitive and partially offsetting our cost inflation that we're experiencing. We're looking to build new referral pathways with general practitioners in New Zealand and leverage the acquisition of Horizon Radiology and IDX's leading New Zealand radiologist team.
We're gonna accelerate the use of teleradiology, digital and AI technologies. We'll continue to drive our ESG strategy. We'll nurture and develop our culture and leadership further. We'll make sure that we integrate our recent acquisitions well. No further acquisitions are contemplated at this time, as we're focused on driving our organic growth of the strong platform that we have. I'll now open the floor up to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from David Stanton from Jefferies. Please go ahead.
Good morning, team, and thanks very much for taking my questions. Look, a question about what you said about the second half of FY20 23, and you said that it is expected to be materially stronger than first half FY20 23. Can you give us a bit more color on that? Do you mean materially stronger in terms of revenue, materially stronger in terms of margin or potentially both, please?
We did call out that we're seeing progressively stronger revenue numbers, David, from the first quarter to the second quarter and then double digits in improvement in January versus the PCP. We've also called out that we're expecting operating leverage to return with improved revenues. In answer to your question, we believe that both revenue and earnings will be better in the second half.
I'd probably, David, just add to that. I think it's this operating leverage that we would expect to kick in in the second half on what is obviously a fairly high fixed cost base. As Ian said, I think the expectation is we would deliver additional revenue, additional EBITDA, on improving EBITDA margins.
Understood. That operating leverage, does that come from basically higher revenue or can you get your employer costs down as a follow-up, please?
I think revenue is clearly the driver, David. You know.
Yeah.
We're not expecting, you know, further cost inflation on the first half base. Clearly you know, as revenue grows, we do have some variable radiologist costs as a percentage of revenue, but revenue will be the main driver.
Okay. My final question, please. You've mentioned that, you know, in time leverage should be coming down. I wonder if you could sort of give us a potential target for FY2023 in terms of your operating leverage, you know, at 3.1x, should we be thinking more like the longer term average of 2.6 by the end of FY2023? Then as a follow-up to that, can you sort of explain your covenants, please?
Yeah, sure, David. Look, I can't, you know, not in a position to give you a specific guidance on where we'll end leverage at 30 June. I did mention earlier that I think as an overall target, we would see that sort of the medium to longer term leverage would sit around 2.5x . Certainly would expect that we would trend back towards that from the 3.1 in the second half. To your second question, just around covenants, we have a net debt to EBITDA covenant to 3.5x .
Sorry, last question. That's pre or post AASB 16, that is 3.5x ?
That's pre AASB 16.
Thank you so much. We'll get in the queue. Thank you.
Thanks.
Thank you. Your next question comes from Craig Wong-Pan from Royal Bank of Canada. Please go ahead.
Thanks. Good morning. Just wanted to understand the improving organic revenue growth that you saw throughout the first half and then into January. I wondered if you could talk to how much of that was coming through from, like, greenfield sites or kind of growth CapEx and how much might be just the low comp number, given that there was the Omicron variant throughout that sort of PCP period.
Yeah, it would be a combination of both. We haven't differentiated between the greenfield, brownfield and organic same clinic growth. The prior comparable period, especially the early part, July and August, was impacted in the major states and Victoria specifically by the Delta variant of COVID-19. When we looked at the number in the first half of this year compared to the prior comparable period, you know, there was that greater improvement in the areas in the states that had been impacted. States like Western Australia and Queensland were relatively unscathed by Delta.
They were only hurt later in the year by Omicron. The prior comparable period numbers there were a lot higher than they were, particularly in metropolitan Victoria, in the Melbourne area. I don't know if there's much more granular detail we can give on the revenue numbers.
Yeah, probably, Ian, the only thing I would add to your question and probably just to add to Ian's response, Craig, you know, I think that organic revenue growth is being mostly delivered from the base as opposed to, if you like, new greenfield, new brownfield in the period. I mean, there would have been a few, but those, they would have been marginal drivers. I think most of it's coming from the base business.
Okay, thanks for those comments. My second question, just on that comment about getting back to a 20% EBITDA margin, could you just clarify around that timeframe for your expectation there and what your thoughts might be on the longer term margin for the business?
I think, Craig, again, we're not giving sort of specific point guidance at 30 June. I think, you know, we've said that we expect the second half to be materially stronger. I think directionally, we would certainly expect off that stronger second half to see margins expanding again, you know, at the end of FY2022, our EBITDA margins are 20.8%. You know, we would expect, all things being equal, that this cost inflation will at some point moderate and that we'll see continued improvement in volume recovery, pricing, hopefully some better indexation over time that will allow margins to move back up to, you know, where they have been historically. It's difficult to say exactly when that's gonna be.
Okay, great. Thank you.
Thank you. Your next question comes from Steven Wheen from Jarden. Please go ahead.
Good morning, Ian and Craig. Just wanted to focus on that EBITDA margin as well. Can you talk through the more recent acquisitions and what effect they are having on the margin, specifically whether or not that has been a bit of a headwind or a benefit, whichever way it's going? Is there further synergy opportunities to actually help that recovery of the margin for the group?
Yeah. I think, Steve, a couple of comments there. You know, if we take Peloton, margins were probably just a touch higher than our Australian margin, so they would have been a slight contributor to the margin. However, important to realize that Peloton probably has a higher variable cost base than the base business. You know, all things being equal, you would expect that as volumes recover and revenues recover, that we should see greater operating leverage in the base business relative to Peloton. You would expect that the base business margin would perhaps expand faster than Peloton.
I think with Horizon, you know, as a New Zealand-based business, our margins in New Zealand are higher than they are in Australia. So it would've been, you know, a small contributor to margin support in the first half. You know, Horizon is a small business. It's relative to the size of the rest of the group. Again, has a fairly high variable cost base. You would expect to see less operating leverage in that business as volumes recover.
Yeah. Okay. That sort of touches on my next question. The situation of the split between Australia and New Zealand has always been New Zealand, much higher margins than Australia. I just wonder in the current half, what has happened with that delta of margin between the two, particularly now that we don't have indexation and there's been a loss of volume in New Zealand?
Yeah. Look, I think it's fair to say, you know, we don't disclose those numbers for Australia and New Zealand separately, but it's certainly true that New Zealand's EBITDA margin is still quite a bit higher than Australia.
Right. It would've come down obviously quite a bit, but there's still a significant difference between both. Is that what you're saying?
Yes. I mean.
Yeah.
The New Zealand margin, I guess particularly with some of the business in New Zealand was impacted by referrer-owned practices in the musculoskeletal area that was very high margin. Certainly the New Zealand margins would've come down, but as I say, they're still significantly above where Australia is.
Yeah. Okay. Specifically on labor, obviously that certainly was the biggest surprise from my perspective with this result. That has continued to deteriorate in terms of its impact on margins. Have you seen any reduction in your reliance on temp staff to fill the sort of, shortages of employees?
Yes, we have. So in Western Australia, we used to rely on a lot of temp staff based in Perth to service our Western Australian business. Because the borders were closed for so long, we've been able to revert back to our model where we service the regional areas, the more regional areas from Western Australia from the East Coast. That's alleviated a chunk of that problem. The other area of labor that drove our costs high was the advent of Omicron and the wide dispersion, I guess of Omicron in July and August of the half, in the first two months of the half, where we had a lot of sick leave.
That sick leave progressively has improved. You know, as COVID has become much more conditioned that we're all living with, and the quarantine requirements and the like were removed, we've seen, you know, sick leave come down and with that labor costs come down proportionately.
Okay. Going into this half, we're gonna start this half with not as much use of casual staff in WA and certainly not as much sick leave as what has historically been used and well, has what has been the case in first half 2023.
That's fair to say.
Yep. Okay. You are obviously expecting to get some improvement in volume. I'm just trying to understand the fixed cost nature of your, of your labor cost versus the variable. You've obviously, if you're gonna have a big step up in volume, does that mean we're gonna see a step up in the variable cost component of labor? Just trying to understand what the mix looks like there to get a better read on the leverage that exists in that line.
Yeah, I think, Steve, my comment there would be that whilst, you know, acquisitions like Peloton and Horizon may have more variable costs, they're small in the context of the total group. I would expect that the operating leverage that exists in the base business, which has got the higher fixed cost component, would be much greater, and therefore a driver of EBITDA margin expansion as volumes come back.
Yeah. Okay. one final one. The average fee per exam has gone up, what was it? 5.2%. Just trying to understand what the components of that. Is that mix of tests or is it co-payments that you've been able to successfully put through?
Yeah, I think it's mostly a function of mix. Steve, you know, if you look at Australia from a price point of view, we've only had 1.6% indexation from Medicare. We have introduced out-of-pockets on select modalities, in a couple of areas, for example, MRI, in Queensland. You know, I think the, the mix is the major driver there.
Yeah. Okay. Actually, I did have one other. I mean, have you seen some of the other imaging companies, listed companies that have released their results? It would appear that your pressures, cost pressures are far more pronounced than the likes of Sonic and Healius. Do you have any explanation as to why you'd be feeling that a little bit more pronounced than they are? That in fact, theirs is improving with an increase in volume.
Yeah. We've obviously taken a look at our competitors' results. Steven, we don't comment on specific competitors. Both Sonic and Healius, the two that you've mentioned, do have, you know, pathology that did very well from COVID testing over the period. I'm not sure, how, you know, how clean the margin is, I guess, between pathology and diagnostics.
Oh, Wait, sorry, Ian. I was talking specifically their imaging division without.
Yeah.
It does with the pathology.
Yeah. We, we don't comment on our competitors' results. I mean, we can only comment on what we're seeing and, very definitely, we saw a lot of sick leave at the beginning of the half. That sick leave tapered off over time. That drove a lot of increases in our labor costs and, you know, we saw that particularly in the first quarter of the year. We have moved to a more variable cost model with the acquisitions, but the bulk of our business is still on the fixed cost radiologist model.
Which means that we do get that operating leverage as the revenues return. With, you know, the good, strong recent revenue numbers we're seeing, we would see some of that operating leverage come back into the business and margins would improve on the back of that.
Steven, I again, I, the only thing I'd add is it must be something to do with the variable or fixed nature of the way each of us operate, that would explain that difference you're talking about.
Yeah. Okay. Thanks, guys.
Thank you. Your next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Good morning, Ian. Good morning, Craig. I might just follow on about that labor, the labor costs there. You know, if I look at the half, there's a 23% increase in employee benefits. Understanding, you know, we had acquisitions, and you mentioned some of the non-recurring items with some temporary staff and sick leave. If we strip all of that back and look at like for like wage inflation, what would that look like?
Wage inflation itself is pretty similar to general inflation. There are in the group, some CPI-linked contracts we have. Those contracts linked to CPI would be very definitely, you know, linked to the 6% inflation we saw in June, which is when most of our increases were put into place or July.
Okay.
The first of July.
Okay.
Yeah.
Sorry. Keep going.
The other driver of higher costs is that there has been a shortage of specific professional service types, sonographers, for instance. Radiologists, the shortage continues. It has not been any worse over the period. In fact, it's slightly better with the borders open. There's been increased competition for sonographers, and we have had to implement some price increases there and some temporary staff to come in to help out over the period.
Okay.
Because, you know, on the revenue side, the Medicare indexation was nowhere close to what inflation was. We're seeing the difference between, you know, CPI-linked wage inflation and the indexation we're seeing from Medicare and the others.
Lyanne, I suppose, I'm sure you've seen it, but just when you look at the operating expenditure slide and the investor presentation, you know, if you strip out the acquisitions, then, you know, you saw that there was an $8.1 million increase in labor costs. You know, majority of that would have been on, probably on the clinical side of the business. You know, that's, that's the increase that we're seeing on a revenue base that hasn't yet recovered.
Okay. Thank you very much. If we could come back to that 5.2% increase you saw in fees. You know, you comment that that was largely due to mix. Do you think that move to higher end modalities is permanent, or do you think it might shift back to some other average, you know, back to average once we get through or come back to normal levels of activity?
I think that that's going to continue. If you look around the world, the move is more and more to the higher value added, more expensive modalities of nuclear medicine, including PET/CT, MRI, and high-speed CT. You're seeing proportionately fewer entry-level X-rays and basic ultrasounds. So we will see that mix continuing. It's the right thing for the patient. It's something that we as a business have tailored our offering around. And it makes good sense. It's further backed up by the increased move in the doctor population to increase specialization. More and more doctors are specializing.
There are fewer GPs or fewer graduates are deciding to remain on as GPs. As doctors specialize, they tend to order a lot more of the higher value added tests, the MRIs, the nuclear medicine, PET scans. In the case of, you have cardiologists, for instance, the high-speed CTs, which are very useful. We would very much expect that move to higher end modalities to continue. I don't see anything that's really gonna change that over the horizon that we're looking at.
Okay, thank you. Just one more from me. When we look at the free cash flow slide, I noticed that there was a working capital change benefit from, I guess, elevated payables. Craig, is there anything that we should be noting from that or is this just a timing issue?
No, it's just a timing issue. Lyanne, to be honest, part of it was actually driven by the implementation of a new ERP system. We implemented Workday Financials. We processed a lot of accounts payable prior to the switch from a Microsoft Dynamics system. As we made the switch, there was probably a little bit of a backlog, it's just timing.
Okay. Thank you very much.
Thank you. Your next question comes from Mathieu Chevrier from Citi. Please go ahead.
Yeah, good morning, Ian. Good morning, Craig. Thanks for taking my questions. My first one was on the revenue. I was wondering if you think there still is a backlog and whether you think we should see a double-digit kind of growth for all of the second half, or should we be expecting something closer to what you've seen in Q2?
With the double digits growth, you know, the second half has started that way. We're not calling out that it's going to continue that way for the full second half. What we will call out is that the diagnostic imaging growth rates since COVID have declined significantly, and the underlying disease has not gone away. Cardiac disease, cancer is still in the population. Those patients still need to be serviced, their scans still need to be done, and there would be a backlog that still does need to come through the system. I would expect that we would see higher than normalized growth over the next period as we catch up for the COVID years, where scanning was not done to the extent that it should have been.
Understood. Do you have a view on how long do you think that will last for?
Yes. It's hard to say. There's no doubt in my mind that patients are presenting later, they're presenting sicker. There have been fewer screening tests that have been done over the period, which means that fewer cancers have been picked up early enough to act on them. There is the underlying latent demand, if you will, amongst the patient population that does still need to be serviced, and I think we're gonna see a catch up of that over the next, you know, year or two, would be probably the best estimate that I'd be able to give.
It's not been like in previous COVID cycles where each time there's been a lockdown. When that lockdown has been lifted, we've seen a spike in patients returning. This time it's been much more gradual. I would think that the underlying latent disease burden is still there in the community and will still need to be serviced.
Understood. Just a final one on the revenue increase of 4.1% in Australia and the average fee per exam being up 5.2%. Should we read into that volume has declined?
Yes, there was a very small decline in actual number of exams, about 1%.
Great. Thank you so much.
Thank you.
That decline would be appropriate in the, you know, in terms of the bigger picture where patients are getting, you know, 1 MRI that can substitute for, you know, a battery of basic X-rays that were previously done, ultrasounds that may have been non-definitive, whereas the MRI gives you the answer. It makes sense that we would continue to see the movement towards these higher value-added modalities. The actual volume of tests where, you know, looking at an X-ray and counting that as one and counting a PET scan as one just doesn't really make any sense. Revenue is the number that we focus on more than volume.
Thank you. Your next question comes from David Low from J.P. Morgan. Please go ahead.
Thanks so much. Could I just start with the indexation? Any thoughts on what indexation will see in Medicare for the year ahead? Also, if you might comment on New Zealand on the same basis. Just wondering if you have any sense of things, given where CPI is and your feedback from the department or the government, please.
We don't have any specific feedback on where indexation is going to land from Medicare this year. Looking at when the timing of the decision is made on indexation, I am a little optimistic that we should see a better indexation number this year, because last year the decision that was made must have been made in around March or April, prior to the inflation numbers, the higher inflation numbers really being seen. The decision was announced in April or May of last year to be enacted from the 1st of July. The decision was made, I think, based on inflation numbers that were not as high as what they turned out to be in the June, July, August timeframe.
I would hope that this year we would get an indexation number that would be closer to inflation. I also think supporting that argument would be the publicity that there has been around some doctors, particularly GPs, who receive the same indexation as what we receive and around the bulk billing rates that have gone down amongst GPs because of the lower reimbursement and the low indexation that was received. You know, for those reasons and based on the fact that the Medicare indexation is supposed to reflect CPI and wage indexation, a product of those two, and was nowhere close to it last year, I would hope that this year we would get a number that was much more reflective of where CPI and wage inflation is.
Yes, I agree. I've not focused on indexation in the past 'cause it hasn't been particularly important. I mean, is your sense of it over the years that the Medicare indexation doesn't necessarily match up with CPI? I mean, Is it quite volatile relative to CPI? Or is your experience that it tends to match roughly with CPI over time?
Well, the largest divergence was last year when CPI was so much higher than Medicare indexation. In previous years, just 'cause CPI [crosstalk]
20 years without inflation. Yeah, 20 years without inflation, I guess it hasn't mattered. Just New Zealand. Any sense there as to whether you should get indexation from the Accident Insurance Board and the DHBs?
Yeah. We don't have any specific information on it other than the fact that New Zealand inflation has been very high, we would hope that that is taken into consideration.
Okay.
David. Just one other point to add, and no idea whether this has impacted on the decision, but probably important to note that the DHBs in New Zealand have been going through a consolidation process, so effectively moving to, like, one system, but like the UK with the NHS and whether that whole sort of consolidation has affected their thinking around the, you know, the pricing they're offering is maybe part of it, but who knows.
Any sense as to whether that, I mean, the media attention here on GPs, we probably all know well. I don't track New Zealand news to the same degree. Any sense as to whether that pressure is similar, that other doctor group, medical groups are calling for the need to increase?
Yes, there are.
Okay.
I don't know if it is as prevalent as it has been here recently, but very definitely in New Zealand there has been a move amongst many of our referrers to lobby the various payment authorities, the government and the other payers with regard to increases that more closely reflect inflation. Certainly from the private insurance companies, we have been able to negotiate rates that are closer to what inflation is.
Okay. Thank you. Just one other topic. I mean, you've commented on private billing. We've seen the average price. Sort of wondering, you know, what has the private billing experience matched your expectation? By which I presume means a volume hit, certainly initially, but in due course, a benefit. I was just wondering if that's been the experience and then whether you could comment on what the plans are on that front, please.
There is a decline in volume when we do introduce our gaps or increase our gaps. We do see that volume decline. Generally, in almost every case where we have done it, we've monitored the market well in each case, the increase in the gap payment more than offsets the decline in volume. What we've also noted is because we have a fairly concentrated presence in each one of our markets, that our competitors tend to follow our price movements quite closely.
We've not seen instances this time around when we've increased prices this time of competitors that are bulk billing in order to attract or retain patients. You know, for the most part, everybody's facing the same kind of margin pressures, and they're looking for our lead in terms of price increases when we do put them in place.
Success would suggest more should be done?
Yeah, we can probably be bolder around our increases. I think that that's right. We've systematically increased prices. We did a price increase on the first of August. We did another one on the first of January. In some of our businesses, you know, every market, we do treat differently based on local dynamics in that market, the competitive environment in that market, et cetera. The big changes that Craig spoke about earlier, the $150 co-payment for MRIs that was put into place in the Gold Coast on the first of July and then on the first of August in other areas in Queensland. We did see competitors following us with much the same kind of gap payments after we implemented ours. So I think you're right.
I think we probably could be bolder in every discussion that Craig and I have with our general managers. This is, you know, top of the agenda in each meeting we do have with them. We do look to encourage each one of our local businesses to be bolder around the price increases because, you know, the volume decrease has not, you know, has not been there to nearly the same extent as what, as what, you know, a lot of the GMs are concerned about when they put the price increase in place. We will do more price increases. We do them selectively. We do them in each one of the local markets based on, you know, local market conditions. We're pressing harder to do more and to do larger ones each time.
Probably just to add, Ian, I mean, in terms of the comment we make about the second half being materially stronger, part of that is driven by price increases that are being implemented now, that will predominantly affect the second half.
Thanks for that, Craig. I mean, I must say, I sense from both of your answers that you don't really see this as a material contributor, or am I misunderstanding that?
I think it's a you know, it's a fair point, David, that it's difficult to just say, "We're going to take, for example, you know, a 5% across the board, every business, every modality." It just the business doesn't work like that. I think each of these are, you know, businesses that operate and compete in the markets that they operate in, and you have to take a slightly bespoke approach to make sure that you take price to recover costs where you can, but remain market competitive.
And in some cases, we have been a price leader and others have followed. You know, it's. You can't just sort of load a 5% higher price in your, in your system and then have that sort of, wash through all the patient studies that you deal with.
No, no. Understood. Thank you very much.
Thank you. Your next question comes from Saul Hadassin from Barrenjoey. Please go ahead.
Good morning, Ian and Craig. I'll try and stick to two questions. The first one is in that commentary around the growth rates in 1Q, 2Q. I guess for us to contextualize those, we need to know what growth did in the previous year. Was there significant difference in revenues generated in 1Q versus 2Q? Can you give us a sense I think you did mention there was a step up in revenues in the second quarter. How material was that? Can you give us any quantification of what that actually means in dollars?
Yeah, look, Saul, you know, good question. I think I've just answered to say that, I think y ou should see that, you know, the second quarter revenues were higher than the first quarter. Those % that were quoted are weighted based on the revenue in each month. July over September, October, November, December. You are seeing an increase in absolute AUD. July was particularly poor.
Thanks, Craig. I'm assuming January PCP was also a particularly weak comp. Again, just trying to contextualize the 10%. Is it fair to say that, you know, that the January of 2022 was indeed a soft month?
I think that's true. You know, when we call out January double digit, it wasn't sort of just sneaking into double digit. It was, you know, stronger than that. I think, you know, if we look at February month to date, I think fair to say that, you know, February is still double digit.
Okay. Thank you. Just the other question was on, Craig, this is a clarification, but I think you mentioned the total OpEx dollar cost in first half. You expect that to be, sort of replicated in second half. Is that effectively what you're saying?
Look, I would say broadly yes, but you would need to reflect the fact that we're expecting higher revenues in the second half. Obviously, you know, our radiologist's remuneration does have a variable component. Part of it's fixed, part of it's variable. As that revenue grows, you'd expect that radiologist cost to grow. You know, it's just that part. If you exclude all the radiologist costs, I think, you know, we would expect to see second half probably not dissimilar to first half.
Great. That's all I had. Thank you.
You're welcome.
Thank you. Your next question comes from Andrew Hodge from Credit Suisse. Please go ahead.
Morning, Ian. Morning, Craig. Thanks for taking my questions. The first one. My understanding at the end of second half 2022 was that the New Zealand referrer issue had been in effect, stabilized. Through the second half 2022, we saw a decrease in the run rate, but a stabilization. That effectively becomes an average through FY 2023. It's lower in effect. Your commentary suggests that New Zealand referrer issue hasn't quite stabilized at this point in time. Is that correct? Or is it stabilized, but it's just running through as an average now?
It's stabilized probably and running through at an average now. We're still impacted by it in the second half, but, you know, we're probably at that lower base now. There is still activity by the New Zealand Institute of Independent Radiologists to look at curtailing those activities around non-arm's length referrals. Importantly for us, though, we've put commercial mechanisms in place where we're getting to the GPs before the GPs make the referrals to those orthopedic surgeons who own their own facilities. I think that has begun to help, and I think we'll see further traction from that going forward.
Thank you. Just one second question or a second question. Craig, I know you answered before on the working capital with the payables. Nothing to read into that. My question relates to just whether the working capital on a proportional basis is sustainable going forward as your revenues increase. Is this the level of working capital we should be thinking about for the business going forward?
Yeah. I think we'll, you know, we will see, you know, to the point around accounts payable being a timing issue. I think we'll see some reversion there, that will go against us from a working capital perspective. I think probably need to normalize that. Yeah, I'm not sure there's much more I can add to that. I just think, you know, accounts payable at 31 December was sitting higher than they ordinarily would have been had it not been for the systems implementation.
Great. Thank you.
Thank you. Your next question comes from David Bailey from Macquarie. Please go ahead.
Thanks. Morning, Ian. Morning, Craig. My question was just around radiologists. You mentioned some tightness in the labor market. Just with specifically in relation to radiologists, just wondering what the driver is there. Is it lack of graduates coming through, or is it some offshore dynamics as well, driving that tightness at the moment? Do you think, you know, that will sort itself out in the near term, or is it a, sort of a longer term issue?
I think it's an issue we're gonna face in the medium to longer term, David. I think it'll be sorted out with technology as well as new graduates, as well as overseas graduates coming in. None of those options are, you know, short-term fixes. For instance, artificial intelligence and improved technology around digitization of the images, we would see improvements in efficiency based on that coming through. It's gonna, you know, these things do take time. The borders have opened up. We have, you know, we've welcomed our first International Medical Graduates back into the country last year or during the first half for the first time in a long time.
That does alleviate some of the shortages we have, particularly in those areas, in those regional areas that depend on International Medical Graduates and in New Zealand, where we've been taking in international graduates, not just radiologists, but in the technical staff as well. I think that the changes in immigration in both countries will alleviate some of the problems we have. The long-term shortage of radiologists in particular, which is the question you're particularly asking, is an international phenomenon. That will be addressed when artificial intelligence plays a bigger role. To give an example, radiologists 15 years ago used to do, you know, maybe 50 scans or so a day when they were still hanging X-rays and looking at the X-rays in front of a light box. Whereas today everything's digital on the screen.
They're using their PAC systems, they're seeing three times as much than they did 15 years ago, 10 or 15 years ago. There have been quantum improvements in productivity from the digitization of the old analog X-rays from the new PAC systems. We've introduced a Clario system, which is a middleware system that allows radiologists to go into any underlying radiology information system and read those scans, that in itself improves productivity. We see that these productivity improvements will continue to assist with the shortage as each individual radiologist does more, it takes time.
Understood. Just maybe a couple of questions for Craig. Just hopefully easy financial questions. D&A, net interest for the second half. Also, the AASB 16 adjustment you use for covenant purposes in relation to clear da, that would be useful too.
Sure, David. Look, I think, you know, you can see probably I'll just refer you to the interim financial report, page 8. If we talk about depreciation first. Depreciation and the right of use assets, the amortization of the right of use assets are separately disclosed. You can see for the first half, it was AUD 12.2 for what I call true depreciation. The AASB 16 number was AUD 8, in total AUD 20.2 for the first half. That compares to the prior corresponding period of AUD 9.8 for depreciation and AUD 6.2 for the AASB 16 adjustment. Totaling AUD 16. The bulk of that movement is caused by the two acquisitions of Peloton and Horizon.
If you look at interest, you can see finance costs also disclosed on page 8 of the inter-financial report, called out that true interest expense on debt sits at AUD 5.8. The total is AUD 8.6. The difference is basically the AASB 16 adjustment. I did clarify earlier that the total finance cost for FY2022 is AUD 5. AUD 3 of that is interest on the debt, and AUD 2 would be the AASB 16 adjustment. Again, if you look at the driver of the lift in the AASB 16 interest adjustment, it's moved from AUD 2 to AUD 2.5. That's driven by the acquisitions.
The lift in underlying interest expense is predominantly driven by the drawdown of just under AUD 100 million of debt on 1 July to fund the acquisitions of Peloton and Horizon. Obviously, interest rates have been rising too. That would be a smaller contributor to that lift in interest costs from, let's say three in the prior period to 5.8 in the last half. We've been shielded a little bit from rising interest rates on the basis that, you know, typically our debt tranches are locked away for either 30 or 90 days and roll. Those are the drivers in the interest expense line. Does that answer your question?
Oh, yeah. Just more if the first half is gonna be, your second half, sorry, is gonna be similar to the first half is where I was going with it.
Yeah. I think, in terms of interest expense, might be a touch higher, you know, as we roll out of some of the lower priced tranches. Obviously, you've got continued rising rates. Rates, I should probably also just clarify that we basically have variable interest expense. We haven't hedged that position on the basis that the bulk of the debt was drawn down after rates had already moved quite significantly.
We looked at it very closely, but formed the view that the cost of the hedge would exceed, you know, the benefit that we would receive. We risk locking ourselves in to a rate that ultimately was well above where the market will ultimately move on rates, particularly over a sort of a three-year period. I think probably interest expense probably a touch higher in the second half. The depreciation and double AASB 16 right of use asset amortization probably in line with the first half.
Thanks. Just sorry, just the last one was, the adjustment to EBITDA to get to your covenant. What's the double AASB 16 adjustment to EBITDA to get to your covenant EBITDA versus your reported EBITDA?
We would adjust out the right of use asset amortization of about AUD 8, as well as the interest AASB 16 amount of AUD 2.5. In total, it's AUD 10.5.
All right. Thank you.
That's the double AASB 16 adjustment. Obviously you then have to put in the rent expense back above the line. We've actually called out in the notes the adjustments that you need to make to restate the numbers on a pre-double AASB 16 basis.
Thanks.
You're welcome.
Thank you. Your next question comes from Andrew Paine from CLSA. Please go ahead.
Yeah. Hi. Thanks for taking my question. Just trying to think, what are the proportion of fixed radiologists cost versus the variables? Do you have any idea how this compares with the industry?
We do know how it compares in each local market. I'm not sure about an overall comparator. For instance, we pay fixed salaries in Western Victoria and on the Gold Coast in Southeast Queensland. Most competitors in those areas are also paying radiologists on a fixed salary. We're paying a variable salary in, on the Sunshine Coast and Central Queensland, and most competitors are similar in those areas.
In Western Australia and in New Zealand, we have a hybrid model with both. That's sort of how we compare overall. If we look at the majority of our doctors today, we still have a fixed remuneration for most doctors in the group, for the majority of doctors in the group. With the acquisitions, we have more doctors on variable pay. We still have the majority on fixed.
Okay, sure. I'm just trying to think about how that trend's gonna look like going forward. I'm just thinking that the radiologists probably benefited from the six contracts through the last couple of years of low volumes. As volumes recover, this may see a bit of a shift in preference to sort of radiologists and could see some competition creeping in. Is that a concern to you, or you think the radiologists that you have are pretty happy where they are and, you know, grateful for the last 18 months to you?
I think they are largely grateful for the support that they have received from us during the lower volume periods during COVID. There's no doubt about that. We do see evidence of that. Going forward, there are more radiologists and more of the young radiologists, young, smart, hungry radiologists, looking for variable pay arrangements where they can benefit from doing more work. I think we are going to be seeing more of that over time. Yes, it does take away from some of the operating leverage we get on the upside as the revenues come back.
It's also very helpful to have radiologists looking to do that extra work, that extra high revenue work that comes in. I think over time we'll see more and more of the mix towards a variable model. Although we're not looking to change those radiologists that are currently on a fixed salary, We're gonna keep that. We're grandfathering in those contracts because we get leverage on the upside. You know, we've seen revenue increasing and continuing to increase into this half. That's gonna benefit us.
Sure. That's great. Just one quick last one. Just on New Zealand. You're talking about, you know, trying to get some price increases over there. Obviously the ACC's looked at the kind of the higher tech modalities over there and some commentary around it, they're higher priced than rest of the world markets. Like, do you see risk of, you know, not only the freeze but some cuts coming through to the MRI and CT through those channels?
The ACC is in a very similar position to workers' compensation in Australia and in other developed markets. It's in the interest of workers' compensation, WorkCover type payments to be at a higher level than the general market, than Medicare, for instance, so that they can get their patients seen on a priority basis and back to work sooner. The ACC, just like WorkCover, is on the hook not just for the medical expenses, but also for the salaries of patients while they're not working. I would expect that their levels of reimbursement for scans would continue to be higher than the average because they do want their patients to be seen quicker, a diagnosis to be made quicker and to get back to work faster.
I would see that continuing to be their primary driver, and I would hope that this year we do see indexation coming back in the ACC payment. I think a bigger drive for the ACC was the fact that there was additional competition in the market this year with the new surgeon-owned practices. I think that was part of the reason that we did not see the expected increase that we receive every year from the ACC.
No problem. I'll leave it there. Thanks very much.
Thank you. Your next question comes from David Nayagam from E&P Financial Group. Please go ahead.
Thank you. Look, you talk about, driving organic growth through improved utilization, among other things. I'm just interested, if you could please provide some indication on where utilization was during the past half, with respect to comparable periods and where you think it could get to in the coming periods.
We definitely have had capacity over the previous COVID impacted years. Our model is geared to the 6%, 6.5% revenue growth that the diagnostic industry has experienced for years, and that's what our model and our purchases were geared towards. We've got the capacity in our system now because we've not seen those kind of increases for the last two years, that we can accommodate additional patients in the system without having to spend more on capacity expansion. We have growth projects that are underway, greenfields and brownfields. You know, brownfields growth for us is the most certain of the three growth paths being, you know, greenfield, brownfield and acquisition. Brownfield is where we know the market well, we know the referrers well, we know the demand for that particular modality.
When we put a brownfield in, invariably the brownfield hits its numbers quite quickly. We would expect that, just in terms of capacity utilization, we've got, you know, a fair amount of capacity in most of our clinics across the group that we can accommodate the extra volumes as they come through without having to add capacity other than those brownfields which we've showcased.
Okay. Thank you very much. Just my second question. Look, I know you had a lot of questions on EBITDA margins already, look, could I just ask if you could maybe just give us some indication on the progression of margins from Q1 to Q2 and if you envisage a trend continuing into Q3 and Q4?
Yeah, David, I think probably, you know, follows revenue. Made the comment earlier that second quarter revenue is stronger than first quarter. Therefore, you know, would say that the second quarter margin was stronger than the first quarter, we would expect that to continue in the absence of, you know, any extraordinary events.
Okay. Thank you.
Thank you. Your next question comes from Rod Sleath from Rimor Equity Research. Please go ahead.
Oh, hi, Ian. Hi, Craig. Thanks very much for all your time this morning. I won't ask any more questions on the results because you've done a fantastic job of providing a lot of information, and everything I had to ask has been already asked on that basis. I've just got two sort of more general questions. One, I guess is, consolidation, in the industry, which obviously has progressed at a, you know, reasonably rapid rate over the last decade or so. In this environment where we've got hopefully short-term, lower listed company valuations in the sector and, probably more importantly, higher interest rates taking place, are you getting a sense that that consolidation is going to slow down for a while? That's sort of my first question.
We're not consolidating ourselves right now. We're not driving consolidation in the market like we have in the past. To the extent that we have an influence over the market, we would see, you know, a slowdown from that perspective. Diagnostic imaging benefits from economies of scale. There is no doubt about that. The presence that we have, the strong market positions we have in each geography we serve, is you know, is looking across our group is a driver of the better margins in the group. We're able to extract, you know, better margins, better pricing, better utilization, better capacity utilization and staff utilization in areas where we have clinics that are close enough to each other to share the load.
I think that that kind of driver in the industry will continue. For us right now, when we talk about integrating our acquisitions, it's integrating the acquisitions in such a way that we can load balance across the clinics that we have based on the acquisitions we've made. We've deepened our presence, we've broadened our presence on the Sunshine Coast, and we have a very similar presence there now to what we have on the Gold Coast, which has been our most successful business for a long time. Similarly over in New Zealand, where we've deepened and broadened our specialty mix that we service to include many more GPs than we've serviced in the past in the Greater Auckland region.
There again, it's been part of a deliberate strategy to deepen and broaden our presence in these markets because that's where we do best when we have this kind of concentrated presence. We don't see businesses doing better out of just being larger overall. There are back office shared services, economies of scale that do come into play there. But the real drivers for the economies of scale are when you can build that concentrated presence in a specific market.
Healthcare is still very much a local market, and almost always will be because, you know, GPs work in the local market. They refer to specialists who work in their local market, and I'm referred to diagnostic entities and hospitals within that local market as well. It's not like pathology, where you can move specimens very easily across the state and even interstate and nationally. Diagnostic imaging is very much a local market.
Certainly. Okay.
It's a long-winded answer, I guess, to the fact that consolidation in diagnostic imaging works, and there's, you know, good benefits from it.
Yeah. Yeah. There's good drivers for it to continue. My second question, which you sort of did speak a little bit on, obviously, you know, Integral was very early at introducing artificial intelligence to some of your imaging. I just read the other day that I think there's now 394 FDA approved AI algorithm tools for diagnostic imaging. I was just curious where you are up to on that. If you have been continuing to roll out new, I'll call them algorithms for want of a better word. And I guess within that, what is the biggest blockage to doing this on a larger scale?
Thank you. That's such an interesting question and an exciting one for us because artificial intelligence is the next frontier for productivity for radiologists. We're seeing, just based on the algorithms that we've already introduced, efficiency gains, productivity gains growing each month from increased use of these algorithms. We think that this will continue. For us as a company, we, you know, internally, we like to say that it's important for us to stay on the leading edge of things like AI, but not necessarily the bleeding edge. In other words, we don't need to be the pilot company that pilots the newest FDA-approved AI application that comes onto the market.
We use applications that have proven themselves in other DI markets and where we think that there'll be clear patient benefits or productivity benefits or safety and efficiency benefits from the introduction of the new technologies. We are optimistic in what diagnostic imaging, in the benefits that diagnostic imaging will get from artificial intelligence going forward. We're not, you know, we're not baking that into our near-term forecast. We've seen based on, you know, the AI algorithms that we've had in the market for a long time. We've seen their continual adoption, their increase across our entire business, starting from individual business units and rolling out to every, you know, most radiologists in that business unit and then across the country. These productivity improvements will continue to grow, and they'll grow for the benefit of patients and referrers.
What we're seeing more of now, which is quite interesting, is that instead of just the productivity improvements which we looked at in the initial AI applications, we're looking now at applications that drive additional demand into the system. They pick up anecdotal findings that would not ordinarily have been picked up by radiologists but do need to be followed up on. They drive additional imaging that is good for the patient and needs to be done and good for picking up diagnoses early, but would not have been picked up previously. You know, it's not just productivity improvements, but there was the revenue improvements that'll come about from AI too. AI is gonna make a big difference to patients and to our industry.
For sure. For sure. It. In that sort of circumstance that you've just described, if your system does an automatic check, that is beyond what was the initial referral, presumably the result of that check then goes back to the GP or specialist who made the original referral for them to then come back to you to say, "Yes, please, could you explore that further?" Or do you have the ability to almost on refer to yourself?
Radiologists can refer for additional studies if they see it warranted. Generally, though, what we would do is call the referrer and say that there has been this anecdotal finding that has been picked up. We think that it needs to be followed up on and we would like to do that and, you know, have a discussion with the referrer and an educational phone call, if you will, with the referrer to just explain how the anecdotal finding has come about and why we think the additional test is required. Referrers are generally very, they're, you know, always very grateful for it, and it's for the benefit of their patients. You know, it's a good thing for everyone. It's a good thing
Yeah.
-for the patient, and it's good for the industry. It's, you know, it just improves the quality of the service that we're delivering.
That's great. Thank you very much.
Thank you. Your next question comes from Reece Frith from APSEC Funds. Please go ahead.
Hey, Ian and Craig. Hope you're both well. I just wanna ask you a couple of questions just regarding, just coming from the perspective of, you know, waiting times for, you know, for people trying to book MRIs. You know, in the past you said it sort of fleshed out up to 2 weeks. Has that improved for the half, and sort of where would it sit going into January and February?
We still do have waiting times across the group. Because demand recently has been quite high, you know, the waiting list in some areas of the business have blown out some. We know that our competitors are facing similar challenges as patients are coming back into the system. That latent demand that I spoke about previously is coming back in and, you know, patients looking for more scans, and it's putting, you know, pressures on delivery of these scans through our machines and competitor machines too.
The waiting lists can be managed and have been managed through the co-pays which we've put into place, which have, you know, managed the waiting list a little more and kept them a little better under control because, you know, once patients are paying sometimes they are willing to pay if they can be serviced more quickly, but if they can't, then they'll go to the public system where they can get the service for free. There is that balance in the system. Definitely I think that the kind of demand we saw in January across the industry has caused waiting lists to blow out a little further than what we would normally see this time of year.
Okay. Sure. You know, using two weeks as a base, You know, how would you say back in October time that it's improved from there or worsened or stayed the same?
That's not worsened. For us it's roughly the same as where it was in October. We're getting paid, you know, slightly more per scan where we have the co-pays in place. MRIs, which is something you're talking about specifically, which is where there are longer waiting lists. Well, we've implemented co-payments across Queensland of $150 for an MRI. Even if the wait list is not as long as it was before, we're getting an extra $150 for each one of those scans.
Yeah. Okay. Just on sort of radiologists and sonographer supply for you guys into the labor market, can you just on a comment earlier that was made regarding you're seeing inflation sort of at industry levels, it doesn't make sense to me in terms of, you know, the skilled labor, especially that skilled labor is in such limited supply on the back of COVID. Can you just help me work out how that's not significantly higher than general inflation that we're seeing in wages across all employment areas?
It is higher. I'm not Reece, I'm not following the question because we are experiencing inflation in our wage class, there's no doubt about it, and that's exacerbated by the labor shortages we have. It is costing us. We're paying more for sonographers now than we have in the past.
Okay. Sure. Just on sonographer supply, is that improving? I heard you mention radiologists were improving given borders were open. Does that apply also to sonographer labor market as well?
Less so. We don't see sonographers crossing the border as often. Radiologists, mainly in places like Western Australia and Central Queensland, we rely a lot on the IMGs, International Medical Graduate. Sonographers to a much lesser degree. In New Zealand we rely a lot on specialized tech, nuclear medicine technologists and MRI techs, but less so sonographers. Where our sonographer shortages have been, in Queensland, for instance, and over New Zealand, we've looked to alleviate them by putting sonographers in some cases on incentives for additional work that they do over and above their base caseload. We've also looked at training schools. The business we bought, Horizon in New Zealand, has a sonographer training school where we can train our own sonographers going forward.
We've had a training school in Queensland for sonographers for some time, and we're gonna increase our intake to that, to that training school so we can do our own training there. I would see the sonographer shortage getting alleviated over time because you can train sonographers much more quickly than radiologists to go through the system. It's just a couple of years to train a sonographer, especially if they have a base degree in, if they are already a technologist in the system or they have an undergraduate degree, then you can train them in two years.
Yeah. Okay. Just on supply chains, I know things are sort of easing into 2023, I just wanna see if that's the case for MRI machines. I know they were sort of particularly worse before sort of all the COVID supply chain stuff kicked off. What's your waiting time for an MRI machine if you ordered one today, roughly?
Yeah, those waiting times have blown out. We do have some machines on order, and it's probably, I'm estimating now, it's probably about four or five months from order to delivery.
Okay. Right.
Not as bad as it was during the depths of COVID-19, but it's nowhere near as good as pre-COVID-19.
Okay. Sure. Sure.
Thank you. There are no further questions at this time. I'll now hand back to Dr. Kadish for closing remarks.
Thank you very much, and thank you to all of you who are still on the call, and it's gratifying to see how many of you have remained on what has been a fairly marathon call for Craig and I. We're very appreciative of your engagement and interest in the business and look forward to meeting with many of you over the next week or two. Thank you very much and thanks, Darci.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.