Thank you for standing by, and welcome to the Integral Diagnostics Fiscal Year 2024 IDX Half Year Results Call. 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. Please go ahead.
Thank you very much. My name is Ian Kadish. I'm the Chief Executive Officer and Managing Director of Integral Diagnostics. I'm joined here this morning by Craig White, the Chief Financial Officer of Integral Diagnostics. We're pleased this morning to be able to share IDX's first half financial year 2024 financial results with you. At IDX, our vision is to build a healthier world, and we do this by delivering the best health outcome for every patient we serve. We always put our patients first. We demonstrate medical leadership. We ensure that everyone counts, we create value, and we embrace change. We delivered on our values in the first half of 2024 by serving 600,000 patients. In the first half, we performed more than 1.3 million exams.
We invested AUD 11.7 million in CapEx, including investment in additional upgraded equipment, and we've continued to upgrade our technology to enhance the patient and the referrer experience. We have 254 reporting radiologists in the group, and we continue to grow our IDXt business, the teleradiology arm of IDX, to provide services to more external as well as internal clients. We continued to develop our subspecialty reporting capabilities so that we could capitalize on the specialist expertise we have within the group. We have 1,968 employees at IDX, and we conducted temp checks and pulse surveys on our employees, which demonstrate a continuing improvement in our engagement scores. We continued to focus on delivering our ESG strategy in accordance with, with regulatory requirements.
We increased revenue by 7.2% organically in the first half to AUD 231.3 million. We increased our operating EBITDA by 8.7% to AUD 43.2 million. Our operating net profit after tax declined by 5.6% or about AUD 400,000- AUD 7.4 million due to prolonged cost inflation and the higher interest rates. We declared a first half FY 2024 fully franked interim dividend of AUD 0.025 per share. We've invested AUD 3.5 million in growth initiatives and had 5,605 IDX shareholders on the December 31st. We also are embracing change this year by undertaking a restructure in light of the prolonged cost inflation, so that we can position the business well for the future.
We've broadened our referrer base in New Zealand to include more GPs as we look to combat the non-arm's length referrals in that market. Moving to the first half financial highlights for FY 2024. We demonstrated solid organic revenue growth of 7.2%, offset by cost inflation, and delivered an operating EBITDA of 8.7% and a slightly higher operating EBITDA margin of 18.7% versus the prior corresponding period of 18.5%. Our statutory NPAT declined by AUD 66.8 million, driven by the non-cash impairment of our New Zealand business.
We saw a 5.6% decrease in operating NPAT to AUD 7.4 million, an 8.7% increase in operating EBITDA to AUD 43.2 million, a 6.4% decrease in operating diluted earnings per share to AUD 3.1 cents per share, off of a revenue increase organically of 7.2% to AUD 231.3 million. Our free cash flow decreased by 41.3% due to timing of working capital movements, and Craig will go into more detail on that later in this morning's presentation. Our net debt to EBITDA on a AASB 16 basis is at 3.0, which is a slight improvement over the 3.1 that we were at on December 31st, 2022.
IDX's operating results are consistent with the trading update that we provided on the third of November 2023. The solid organic growth of 7.2% has been driven by improved Medicare indexation of 3.6% from the first of July 2023, and an additional 0.5% effective from the first of November 2023. Both increases exclude nuclear medicine. It was also driven by the annualization of the FY 2023 out-of-pocket fee increases and a continued favorable mixed impact. We faced prolonged cost pressures in the first half, especially higher labor costs in the regional areas in particular, and driven by inflation and labor market supply constraints, together with higher interest spending costs. Management has focused on containing and reducing these costs wherever possible.
It's a priority for us as management, and it is set out further in our key operational initiatives that we'll review later in this morning's presentation. Our operating EBITDA margin of 18.7% is a 20 basis point improvement over 18.5% in the prior corresponding period. We took an impairment loss of AUD 71.5 million in our New Zealand division. It's 35.1% of the AUD 203.5 million carrying value of our New Zealand assets, and it reflects the company's revised, more modest growth expectations for the New Zealand business, consistent with the trading update that we provided on the third of November. This drove a statutory loss of AUD 66.8 million after impairment losses, transaction and integration costs, amortization of customer contracts and other costs, net of tax, of AUD 74.2 million dollars.
Our net debt to EBITDA ratio on a pre-AASB 16 basis of 3.0 at December 31st, 2023, is slightly lower than 3.1 at December 31st 2022, and it's projected to trend downwards gradually over time. The group has declared a fully franked interim dividend of AUD 0.025 per share, the same as the first half of financial year 2023, and represents 78.9% of our first half FY 2024 operating net profit after tax. As the graph on the next page illustrates, the radiology industry is rebounding nicely off its post-COVID lows. This chart shows the benefits in the top curve that Medicare paid to radiology. And on the bottom curve, it shows the services that Medicare paid for these benefits.
The two key takeaways from this chart are that the industry is rebounding well, continues to rebound well from the post-Omicron lows in late calendar year 2022. It also shows, in the divergence between the two curves, that the industry continues to move more towards the higher value modalities, the higher value, more acute modalities, and fewer of the entry-level modalities. That's more MRIs, more nuclear medicine studies, and comparatively fewer basic X-rays and ultrasounds. We show two graphs on the next page. The top one illustrates the operating EBITDA over the past five years, and it shows quite clearly the EBITDA since financial 2022, in the first half, has been improving fairly consistently between 2022, 2023, and now in financial 2024. On the bottom half, you can see the dividends that we paid consistent with the dividends paid last year.
The dividends declared now, consistent with the dividends paid last year, of AUD 0.025 a share. This year representing about 78.9% of our first half 2024 operating net profit after tax. I'm going to hand over to Craig now to take us through more of the financial detail.
Thanks, Ian, and good morning, everybody. Ian's touched on a number of the financial highlights, but just to really, I think, summarize the story and the numbers on slide eight, you can see that we delivered solid organic revenue growth of 7.2%, slightly stronger operating EBITDA growth of 8.7%, on slightly expanded EBITDA margins of 18.7% against 18.5% in the prior corresponding period. Our operating NPAT was slightly lower than the prior year, at AUD 7.4 million versus AUD 7.8 million, and that was just simply driven by the higher interest expense in a rising interest rate environment.
As Ian mentioned, free cash flow was lower than normal, and I'll touch on that in more detail later, but fundamentally driven by the timing of working capital movements. Again, as Ian called out, leverage was 3x , slightly below the 3.1x at the same time in the prior year. Just to go into some of those P&L line items in a bit more detail. On slide nine, I'll talk to revenue.
Effectively, the organic revenue growth of 7.2%, driven by the Medicare increase of 3.6%, effective July 1st, and then the additional 0.5%, effective November 1st, supplemented with the annualization of the out-of-pocket fee increases that we took in January FY 2023, predominantly ultrasound in Queensland, all contributed to drive the solid revenue growth. If we look at it by geography, we achieved 7.8% organic operating revenue growth in Australia. That was slightly lower than the Medicare growth of 9.5%, but important to remember that with our more regionally focused business, the prior year was less impacted by COVID, and hence that affected the growth rate. We had a slightly lower growth rate off a higher base than the industry.
Average fees per exam increased by 7.5%, reflected the Medicare indexation, the annualization of the out-of-pocket increase I talked about, and the ongoing positive mix shift that we've seen for many years towards the higher end modalities of CT, MRI, and PET. And then in New Zealand, our organic operating revenue grew 4.1%, on a constant currency basis, adjusted for working days.
Turning to operating expenditure on Slide 10, as Ian mentioned, we've had a real focus on cost control and cost reduction across the group, and effectively achieved a 20 basis point as a percentage of revenue reduction in total operating expenditure, despite the fact that our labor costs increased by 20 basis points as a percentage of revenue, in a higher inflation environment for labor, given some of the demand supply cost pressures present in the industry. Turning to Slide 11 and the balance sheet, we've touched on leverage, so I won't cover that again. But we do have significant available headroom under our existing financing facilities of AUD 126.3 million.
It's worth noting that we reduced our available facilities by AUD 25 million, with a view to reducing our undrawn commitment fees, again, focused around cost reduction. Cash and cash equivalents have decreased by AUD 15.9 million. Again, most of that is due to timing of working capital, I will be talking about in the next slide. But also, there was a contingent consideration payment made in the half in regards to the Peloton acquisition, and obviously the higher interest expense payments. So then turning to Slide 12, and I'd like to speak a little bit here around cash flow. You can see that we, while we did have a weaker free cash flow, half on half, it was all driven within the changes in working capital.
When you break that down, it's fundamentally a function of a AUD 10.4 million tax receivable in regards to our FY 2023 tax return. We expect to receive that money within the current quarter, so the third quarter of FY 2024, which will obviously go to reduce our net debt position. The other two key contributors were higher than normal accounts payable balance at December 31st , 2022, following the introduction of a new enterprise-wide general ledger system that led to some delays in paying suppliers in the prior year. That was worth about AUD 5 million of the movement, and the remaining AUD 5 million is largely a function of the increase in other current assets, which relate to prepayments for equipment service contracts, software agreements, and a couple of other prepayments.
In short, we would expect that, that adverse working capital movement, to normalize as we receive that tax refund, and some of the remaining AUD 10 million may normalize over time, but obviously, that just depends on the timing of payments. Turning to Slide 13, and capital expenditure, you can see that in the first half, we deployed AUD 11.7 million of CapEx. 8.2 of that was in replacement CapEx, 3.5 in growth CapEx. As you'll see from the presentation later on, we have guided the full-year CapEx in the AUD 30 million-AUD 40 million range. We are focused on, I guess, being judicious about CapEx, but CapEx is typically skewed more towards the second half. I'll hand back now to Ian to cover the regulatory update. Thanks, Ian.
Thank you very much, Craig. Turning to the regulatory environment in Australia, MRI licenses on the November 1st 2022, the federal government deregulated MRI services in regional and rural areas, defined as Modified Monash Model 2-Modified Monash Model 7. As of the date of this presentation, no further licenses or plans for deregulation of MRI licenses have been announced for the MM1 areas. With regard to the Medicare changes, indexation was implemented of 3.6% on the first of July 2023, and applied to all radiology services. From the first of November 2023, there was a further indexation of 0.5%, also applied to radiology services.
In addition, on the first November 2023, Medicare also trebled the bulk billing incentive for GPs, and for regional GPs, this represents a meaningful uplift, particularly in some of the regional areas that we serve. In New Zealand, there's limited indexation of pricing. However, we did receive CPI-like increases that commenced in December 2023 from the majority of the private health insurers, and we continue to negotiate with other funders. The regulatory authorities in New Zealand have determined that non-arm's length referral practices, where referrers have an ownership interest in radiology practices or equipment, are acceptable. So we're pursuing some strategic initiatives as a result of this, including developing our GP referral base in New Zealand, because the GP segment is less impacted by non-arm's length referrals.
In both Australia and New Zealand, international medical graduates, radiologists, and referring doctors, and other clinicians, including sonographers and nuc med technologists, are slowly returning to New Zealand and regional Australia after a two-year hiatus during COVID, and they're helping to alleviate the skills shortage, particularly in these regional areas. Turning to our strategy update. We will continue to drive organic earnings growth, including through the focus of our key operational improvement initiatives. We will accelerate the use of teleradiology, digital, and AI to improve the patients' and referrer experience. We will drive our environmental, social, and governance strategy, and nurture and develop culture and leadership across our people. And as balance sheet capacity permits, we'll consider accretive acquisitions that represent a strong cultural and strategic fit. The company believes that the fundamentals of the essential radiology industry are strong.
Our industry benefits from being at the confluence of major global trends, demographic and technological. Demographically, the aging of the population and the increased prevalence of chronic disease and earlier detection capability will drive demand for diagnostic services. With regard to technological advancement, digitization, and the growth of teleradiology and AI is expected to improve the quality and the efficiency of the care that we deliver. The structural shift to the higher acuity modality is also expected to continue, and IDX, as a specialist, regionally focused, high-quality provider of diagnostic services, is strategically well positioned to benefit from these important trends and to grow our services strongly going forward.
In FY 2024 and beyond, the company is focused on executing the above-mentioned drivers of IDX's strategy to grow its business and, in particular, to focus on execution of key operational improvement initiatives, including important cost initiatives, which are expected to lead to an improvement in the second half FY 2024 trading performance and the operating EBITDA margin compared to the first half of FY 2024, and to be in line with or slightly higher than the second half FY 2023 EBITDA margin of 20.2%. For the month of January 2024 and up to and including the February, 15th the company achieved solid revenue growth of 11.6%, or 7.8% after adjusting for working days, compared to the prior corresponding period.
Our FY 2024 replacement and growth CapEx, as Craig indicated, is expected to be between AUD 30 million and AUD 40 million. Turning to our key operational improvement initiatives. As discussed at our AGM last November, we're focusing on improving our patient and referrer experience, including the rollout of integrated patient booking systems, enhanced e-referral platforms for our referrers, and educating patients and referrers on some important high-volume radiology tests for the early diagnosis. Example, high-resolution chest CT for smokers and cardiac CTs for patients at risk of heart disease. We're continuing to develop our workforce, including subspecialty reporting through the use of technologies such as integrated work lists and artificial intelligence. We're growing our sonographer training program through an internal training school to address our workforce shortage.
We're looking to and aligning more closely staffing levels to match our patient demand, and we've increased our regional radiologist registrar positions at IDX sites. Importantly, we're increasing productivity and efficiency. We have simplified and reduced our management layers in our organizational structures so that our decisions are made closer to the front line. We continue to drive non-labor cost efficiencies, too, and we continue to grow our teleradiology service, which assists us in cost-effectively balancing the workload. We're looking to lift asset utilization by focusing on improving the utilization of our existing machine installed base. We're investing selectively in higher-end modalities within our FY 2024 budgeted growth CapEx, and we're targeting more capital, like teleradiology tenders, including the first New South Wales public hospital teleradiology tender that we've recently commenced. Turning to teleradiology and AI in particular on the next page.
The IDX Teleradiology service began in August 2020, initially internally to the IDX group, but we've systematically rolled it out externally, too, to public hospitals and other private radiology practices. We serve state hospitals in WA, Queensland, and Victoria, and we recently commenced our first public hospital teleradiology tender in New South Wales. We've grown the service organically with 65 contracted radiologists and report about 15% of IDX Australian revenue. The service provides specialist care through subspecialist reporting capabilities, and it allows radiologists in different time zones to report overnight during their daytime hours. It also allows a lot of flexibility for radiologists to report at the time and place that they select. And it includes a variable reimbursement model that's based on the individual radiologist's output. We've used AI and IDX for some time, and we've grown the service judiciously, slowly and judiciously over time.
It currently accounts for about 5% of IDX volumes and growing, and growing systematically. With regard to ESG, IDX continues to implement and develop our ESG strategy to comply with the proposed climate-related disclosure standards in Australia. I'm gonna open up at this point to questions, and we'll hand back to the moderator.
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 are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Sebastian Clemens with Jarden. Please go ahead.
Morning, Ian, morning, Craig. I'm just stepping in for Steve here. So just a question on the margin improvement in second half to be in line or slightly higher than 20.2% in last year. Can you just go through some of the key drivers for that margin improvement? Is that, is that gonna be based on some of the growth you've seen to date, just noting a trading update, or is that more a moderation of costs? And then within that, if you could give us a breakdown of how that looks in New Zealand versus Australia, that'd be great. Thanks.
Yeah, sure, Seb, let me comment on that, and Ian might want to add something at the end. Look, I think a couple of things, you know, I think you can see we've had a solid start to the second half in January and through to mid-February with the 11.6% reported growth or 7.8 on a adjusted for working days. So that's certainly, I think on the top line, gives us confidence. I think the second thing is the focus on controlling and taking costs out of the business, also will contribute to that margin expansion. And I think the third thing is that if you look at the business historically, it is slightly skewed towards the second half seasonally.
It does vary slightly year to year, but the second half is typically stronger, particularly the months of May and June. May would be typically the biggest month, probably for the industry. So I think this combination of those three things, which the drivers are supporting that statement. Ian, I'm not sure if you want to add in.
Yeah. So the 0.5% Medicare increase from November, 1st helps the second half more than the first half, and also the increase that we've received from our major insurers in New Zealand, the CPI-related increases in December, really only impact the second half. So those increases would come through mainly to the second half. And as Craig pointed out, the revenue growth that we've continued to see as this year has begun, gives us, you know, operational leverage that assists with the margins, and should assist us in the second half. It gives us the confidence to indicate that we'll be, you know, at or slightly ahead, well, we'll be slightly ahead the second half from financial 2023.
Yeah, and just, just one follow-up on that. So that 11.6% growth, we obviously haven't seen the Medicare data for January or, or, or February. But do you think you'd be tracking ahead of the market? I just remember that during this half, one of the, the key drivers of the underperformance was a stronger comp. Do you expect that to continue to be the case in second half?
We have seen a start in the second half. We're not sure, I mean, as you indicate, the Medicare numbers are not yet out, but we're a little different to the Medicare stats in even within the states that we operate. For instance, in Victoria, we're very much outside Melbourne, whereas the Medicare stats would reflect the Melbourne area more. Similarly, with regards to the other capital cities in Queensland and WA, where we're more in the regional areas.
So, yeah, you know, based on the geographic profile of our practices and based on the differences that we've seen in recent years, you know, during COVID and the changes after that, and also with the population growth we've seen in some of the capital cities, Sydney and Melbourne in particular, it's been a little different in the regional areas. So it's not that comparison is not as crisp as it was previously. I don't know, Craig, if you wanna add anything to that?
No, I think, I think that summarized it well, Ian.
Yeah, and, and sorry, just last one, that 11.6, what's that in Australia then? Because that's for the group.
Yeah, look, we haven't split it out, but I think, you know, it'd be fair to say that, you know, both Australia and New Zealand have had a solid start to the year.
Okay. Thanks, guys.
The next question comes from Rita Fung with RBC Capital Markets. Please go ahead.
Thanks, Ian and Craig, for taking my question. So your net debt to EBITDA was at 3x at December, and you've previously mentioned that you'll be targeting a leverage ratio of 2.5x. Are you guys able to provide a timeframe as to when you'll reach this target?
Yeah, Rita, look, you can see that we've, the statement we've made is that we expect it to reduce gradually over time, so we haven't put a timeline out there, deliberately. But, you know, I think following the trading update that we announced on the third of November last year, just in light of that trading update, we indicated that the, the journey to 2.5x was gonna take longer than, we thought, but that it is gradually reducing over time. That's, that's probably as much as we can say.
Okay, great. Thank you. And just one more question from me. Are you guys seeing labor supply pressures across both your regional and metro clinics? Can you also remind us what percentage of your clinics are regionally placed?
I don't think we have an actual percentage of which of our practices are regionally based, but our strongest market share is up in Queensland, where we have, you know, very strong market shares on the Gold Coast and the Sunshine Coast. And in regional Victoria, particularly in western Victoria, and then in regional WA, most areas outside of Perth. And then we're concentrated in South Auckland, which would be more of a metro area. You know, our practices are definitely more regional-oriented, and that's why we'd be a little different to how the capital city perform in some of the states, and we've seen that historically as well.
And then with regard to the first part of your question, which, just remind me what the first part was? The-
Yeah. So, that to do with supply pressures across your clinics and whether you're seeing greater supply pressures within the regional clinics versus your metro?
So, we're seeing some of the labor supply challenges slowly dissipate. In other words, we're seeing international medical graduates come into the country. We're seeing that influx assist with the radiologist shortage. There still is a radiologist shortage. It is more acute in the regional areas than it is in the city areas, but the international graduates are required to work in regional areas before they move into the cities, so that does assist. And during COVID, there was a two-year period where no immigration was happening and no doctors were coming into the country, and that hurt us with regard to both the radiologists in the regional areas and referring doctors. But since, yeah, you know, over the past year, or slightly longer, we've seen doctors come back into the regional areas.
We've seen some international graduates come back into the regional areas, and that is helping to alleviate the shortage. We're also seeing similar alleviation, you know, slow, but, but similar in areas like, nuclear medicine technologists, for instance, and even in sonographers, because we're training our own, but it takes time. It takes time to train our sonographers and for them to come out of the programs and to make a difference. But, you know, we are seeing the beginning of that.
The next question is from Tom Godfrey with Ord Minnett. Please go ahead.
Hi, good morning, Ian and Craig. Can you hear me okay?
Yes, we can.
Thanks for taking my questions. My one just follows up from Seb's earlier, just in terms of the improving growth rates you're seeing in January and February. Can we just get some color on sort of the referral mix within that, and particularly, whether you've seen a pickup in GP-led referrals since the change to the bulk billing incentives in November?
Well, there's no doubt that in regional areas, the change to the bulk billing incentive has helped to attract GPs to those regional areas. So that there's no doubt, and we're seeing a pickup in GP referrals in regional areas. We're seeing clinics that are open longer hours and open on the weekends, when previously they were not in places like Mandurah, Ballarat, and other, you know, larger regional, large and small regional cities. Other than that, I mean, we've not shared our specific referral rates we get from GPs and specialists, but it's fair to say that most referrals in radiology, more than 50% come from GPs. We are a little more oriented towards the specialists, but rely a lot on GPs, particularly in the regional areas, and we've seen some pick-ups there.
Great, thank you. And then just second one from me. Just in terms of the cost out, can you give us any additional detail around which management layers, organizational structures have been rationalized? And then more importantly, just the timing, has that all been executed in the first half, or is there more to do in the second half?
It's been executed in the first half, but the results are mainly seen in the second half because the changes would have occurred during the last two months of the first half and the first month or so of the second half. But then we have the full six months benefit in the second half versus, you know, a month or two in the first half. And they've been changes mainly to the middle management and senior management levels that do not directly impact on patient care. So for example, we've integrated our people and culture position. The Chief People and Culture office has been, you know, integrated more into operations, where people and culture are reporting through operations and working much more closely with operations.
And we've reduced the COO level at the company, which we did back in October of last year, and elevated our general managers to the senior leadership team without the intervening COO position.
Just following up on that note, no impacts to operational bandwidth or anything along those lines to date?
No, no. In fact, we've, we've restructured such that we're, you know, able to make decisions closer to the patients and able to get cut-through of important decisions, important, you know, cost and revenue-enhancing decisions, cost reduction and revenue-enhancing decisions, actioned a lot quicker by having our general managers around the senior leadership table.
Yeah, I think, Tom, I'd probably just add that it's not just about headcount reduction, it's actually about the organizational restructure to flatten the structure so that, you know, the key leaders who need to be in the room are all together. I think that will improve not only efficiency, but also the effectiveness.
Thanks, Craig. Thanks, Ian. Appreciate you taking my questions.
The next question is from Dan Hurren with MST Marquee. Please go ahead.
Well, good morning, gents. Can you hear me?
Yes, we can.
Thanks very much. Look, I was hoping we can drill down a little bit more onto the clinical labor costs. And anything you could tell us about, you know, do they improve across the course of the half? You mentioned before that the headwinds are diminishing. We're just trying to... I guess I'm just trying to understand what that looks like into the second half and the following year.
The biggest impact on the clinical labor costs come on the first of July, when the CPI increases are put into place. So it's those CPI increases that, that impact us, you know, quite materially in the first half. But we don't see those kind of increases, again until, you know, for the duration of the second half. And given that CPI is not expected to be as high this year, we wouldn't expect on the first of July this year, 2024, to see the same kind of CPI-type increases that we had during that last year. That would be a major driver of the, you know, increase in clinical labor costs in the first half.
Sorry, Dan, I was just gonna say, you know, what that means is that we shouldn't see a significant change in that labor cost first half versus second half, other than the variable component of remuneration for our radiologists that is linked to revenue. So some of them have incentives linked to revenue, and obviously that moves with, you know, the number of scans that they do.
Well, I guess, without putting too fine a point on it, are you confident that for those, you can get away with paying CPI with that CPI increase? The increases elsewhere in the industry do appear to be a bit sharper.
I guess we don't expect to pay more than CPI. You know, the CPI was pretty high last year. We expect it to be less this year. We've been able, historically, to manage our costs within that CPI-type envelope, and I continue to believe we will do that, especially now with the focus that we have on cost and on productivity, where we're measuring productivity much more actively, much more rigorously, than we ever have before. And we're, you know, absolutely disciplined around productivity and keeping costs down. So I have absolute confidence that we will be able to, you know, certainly keep it within CPI.
Okay, thanks very much.
The next question is from Andrew Paine with CLSA. Please go ahead.
Yeah, morning, guys. Thanks for taking my question. Just wanna know if you're seeing any impact or concerns in the second half over inflationary pressures, and how that could impact volumes or your ability to charge a co-payment going forward?
Andrew, so I think your question sounds quite similar to probably the question that Dan was asking around cost pressures. Yeah?
... Not necessarily. In terms of volume, so your ability to charge co-payments to the patient, you know, are you seeing kind of inflationary pressures impacting, you know, their willingness or ability for you to charge co-payments to the patient?
Yeah. I mean, I think first of all, you know, I think in FY 2024, we've received more reasonable Medicare indexation, with 3.6% in, from July 1st and then the additional 0.5% from November 1st. So we haven't taken significant out-of-pocket increases in FY 2024, unlike FY 2023, where we did take some. So there hasn't been any, any increase. So I don't think—I think in answer to your question, I don't think we're sort of seeing any sort of material impact, on demand caused by sort of, the, yeah, concerns by patients about the ability to pay. I don't, I don't think we're seeing that.
Okay. So, so if I'm reading that right, you're, you're not as focused on trying to kind of ramp up the, the co-pay, given that the, indexation seemed okay?
Yeah, yeah. In fact, last year we increased co-pay quite materially around this time last year. We're not doing that this year.
Okay. So, like, kind of following that forward, the volumes should remain, you know, reasonably healthy based on the fact that, you know, the bulk billing seems to be a focus for you going forward.
Yeah, I mean, I think your best guide probably is the revenue guidance we've provided to mid-February, just to sort of give you a sense of really what's happening out there. You know, obviously, that 7.8% growth, adjusted for working days, includes effectively 4.1% Medicare indexation, and then some positive mix impact. But not seeing a sort of any adverse impact, I guess, on volumes.
Okay, that's great. And just also on the New Zealand business, obviously the impairment there on the slower growth outlook, which you're saying is kind of in line with the previous update. So just, you know, what's your growth rate expectations going forward for the New Zealand business?
Yeah, so I think the important thing is, you know, we are still expecting growth in that market. Basically, you know, if you look at it over time, it's probably slightly less than 5% revenue growth on a CAGR basis, which is sort of consistent with what we're seeing in the market. And then we've just moderated our EBITDA margin expectations to around 30%, which is still very strong, but they're just not as strong as they were. And that's really formed the basis of the impairment that we've taken.
Okay, that's great. And then just one last one, if you don't mind. Just looking forward to getting back to 25% of EBITDA margins. I'm not sure if this has been asked already, but you know, can you provide a timeline there? And you know, what are the real tailwinds for that one to get back there? I know you've mentioned AI in the past, but you know, is that the key driver at the end of this?
I just want to be clear, so you're talking more broadly about the group here rather than just New Zealand?
Yeah. No, no, sorry. Group, EBITDA.
Yeah. So look, I mean, we, we haven't provided sort of long-term guidance, I guess, in terms of where we see that margin, but I think we would expect that, it- we, we should see some continued expansion in our EBITDA margin over time, which will be a function of, you know, continuing, solid revenue growth, driven by the tailwinds in the industry. As inflation moderates, costs moderate. We've, we've talked about, I think, historically, the operating leverage that is, is in the business. You know, we've got a, a, a high fixed cost base, so we should see, continued margin expansion over time, but, but we haven't sort of put a, a, a number on it.
Okay, no problem. That's all I had. Thanks.
The next question is from David Low with J.P. Morgan. Please go ahead.
Thanks very much. Apologies. Just on the indexation, do you have any sense as to what indexation might be for the next financial year?
I think, David, in short, the answer to that is no. It's normally announced around early May, but don't really have any sense at this point.
While on the topic, I mean, the indexation that we saw last year, and including the second step, I mean, how do you think that compared to actual cost increases?
Well, I think it was clearly below inflation. You know, 3.6%, notwithstanding the additional 0.5%, even at 4.1%, that is below the sort of inflation that I think we in the industry have seen. That was, you know, probably closer to, you know, 5.5%-6%.
... including CPI adjustment for enough of the workforce, which clearly was more challenging.
Yeah.
The only other question I had, just on the costs. So we've heard about the restructuring program, the cost savings there, I presume that largely comes through the labor line, the savings you have delivered?
Yeah, I mean, I think, the short answer to that is yes, David. I mean, labor is clearly our biggest single cost, as you can see in the operating expenditure slide. But we are focused on, you know, all those non-labor categories as well. So, you know, that would be everything from insurance, you know, use of external consultants, travel costs, all these sort of things are all getting scrutiny across the organization. And, you know, if we just go back to that slide, in the pack, you can see that other expenses have come down, by 0.5% or 50 basis points a percentage of revenue, versus the prior year. And that's largely, you know, a result of focus on all those cost categories I just talked about.
Thank you. One more on it. I noticed the occupancy cost is up a bit. I mean, I know there's been a bit of change in the way things have been treated there in the past and acquisitions, but anything that explains that bit?
Yeah, I think it's pretty much as we've called it out. You know, it's CPI increases, and we did have a writeback of the make good provision in the prior year, to the tune of AUD 200,000. So that effectively reduced the prior year. That was just a non-cash accounting provision.
Okay. That's all from me then. Thanks very much.
Thanks, David.
The next question is from Elise Shapiro with Canaccord. Please go ahead.
Hi, guys. Thanks for taking the question. Just, you know, you kind of ran through some kind of telehealth contribution and AI, AI opportunities. I guess within the recent telehealth kind of update, what contribution does that have to margin, and how do you expect to impact margin in the longer term?
The teleradiology business has been growing faster than the rest of the IDX business, and we expect it's gonna continue to do so. It currently accounts for about 15% of revenues, but we expect it to continue to go up. The margin on teleradiology is generally stronger than the margin on the existing businesses, mainly because teleradiology is, you know, asset light, and radiologists are paid on a percentage of what they actually deliver during a teleradiology session. So, we, you know, expect to derive further benefits, both in margin and in revenue, as the teleradiology business continues to grow.
We have recently commenced a contract in New South Wales with a public hospital in New South Wales, which has worked very well for us in Western Australia and in Queensland in particular, and to a lesser extent in Victoria. So we're looking to really build on these teleradiology contracts, 'cause they're asset light. They give our radiologists the ability to, you know, work quite flexibly, to work from home, to work from overseas in some instances, particularly for the overnight work, that can then be done during daylight hours for the radiologist, even when it's, you know, overnight for the hospital. So for all those because of all those advantages, you know, we're really keen on continuing to grow the teleradiology business, and we expect it'll do so.
Thanks. And also just with the balance sheet where it is, you know, on the call, you mentioned that you were still looking at some accretive M&A opportunities. What is the appetite for M&A at the moment, as well as for kind of greenfield and brownfield expansion? Thanks.
So we continue on our greenfield and brownfield expansion strategy. We've, you know, adjusted our hurdles based on the current economic environment, but we are very actively looking at greenfields and in particular at brownfields. Brownfields are our favored method for expansion because we know the market, we know the referrers, we know the demand in the area, and we know that the payback is quite quick, and the payback is also strongest from a brownfield. So we do look to brownfields first. We do have a few greenfields that we have in the pipeline as well, and we will look at acquisitions, you know, when the balance sheet permits.
Great. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question is from David Stanton with Jefferies. Please go ahead.
Good morning, team, and thanks very much for taking my questions. Just following up on a previous question, if I may, and apologies if this has already been asked. But do you still expect, you know, EBITDA improvement over the medium term to that sort of pre-AASB 16 level of circa 24%, or have you sort of moderated that, please?
Yeah, David, I think. So we sort of touched on this before. Look, we haven't put a number out there for the future. I think, you know, but fair to say that the aspiration, the belief that we can expand EBITDA margins from here remains. You know, I think clearly the road to doing that has become harder sort of following the trading update that we provided on the third of November. But, you know, we are a high fixed cost business.
As the broader industry really, I suppose, normalizes with the tailwinds we've got, we'd expect that we would see solid revenue growth, moderating cost growth, and with that, the operating leverage come back into the business to see continued margin expansion, certainly beyond, you know, FY 2024, where we're calling second half margins to be slightly higher than 20.2%. But it's difficult to put an absolute number on it. But certainly all the drivers, I think, are there, absent some, you know, extraordinary event.
And David, there is no doubt that over the medium term, technology advancements, including AI, are going to make a big difference in terms of efficiencies. You know, the same way as we saw in the past with the introduction of radiology information systems and with the PACS, the picture archiving and communication system, the digitization of radiology, the advent of teleradiology. We saw all of these things allow radiologists to be that much more efficient. Going forward, we'll continue to see technology, especially AI, continue to make that difference and allow radiologists to do more, in the same way as technology has allowed radiologists to do more over the past, you know, 10 years or 20 years.
The real question really is when is the AI going to, you know, reach the tipping point that makes the same kind of difference that we've seen in teleradiology over the past 5 years or 10 years, and we saw it in terms of, you know, PACS over the 5 years or 10 years prior to that? But there's no doubt that there will come a time within the next, you know, few years that we will see technology, particularly AI, make a big difference in terms of radiologist productivity, and that's what will bridge the shortage we currently have in terms of radiology supply versus demand.
Understood. Thank you. Final question from me. Craig, I'm just wondering if you could give us any kind of guidance in terms of you know, a number or a rate we should be using for interest for FY 2024. I know consensus is around the 22 number for the interest expense. Is that a reasonable number in your view?
Yeah. David, well, if you can tell me what the, Reserve Bank are going to do on interest rates, I can probably tell you what the interest expense will be. But, sorry, I don't mean to be facetious, but I think... Look, let me just tell you. I think if you look at the, the first half interest expense cost, the, you know, the effective interest rate, was around 6.8%. So that was first half FY 2024. It's probably important as well, so I'm talking interest expense.
When you look at the AUD 8.6 million that you can see disclosed in the P&L, within that is what I would call the true interest, but there are also undrawn commitment fees in there of about AUD 500,000 and some amortization of borrowing expenses, which are AUD 200,000. So the effective interest rate for the first half is about 6.8%. Obviously, we had a couple of interest rate increases in the first half, so, you know, maybe the second half, absent any interest rate reductions around, or maybe a touch higher. But, you know, we have guided in our trading update on the third of November to full year finance costs of around AUD 22 million.
That includes around AUD 5 million for the AASB 16 right-of-use assets adjustment, but and there's no material change to that guidance. So I think that's the best number to use.
Very good. Thank you.
Thanks, David.
Excuse me, 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 all for your interest and engagement and participation this morning. It's now 11:00 A.M. We will be meeting with some of the analysts and with our investors over the course of the next two weeks or so, and look forward to meeting many of you in the course of the next few days. So thank you very much for your participation this morning, and look forward to catching up soon. Thank you.
Thanks.
That does conclude our conference for today. Thank you for participating. You may now disconnect.