Thank you for standing by, and welcome to the Integral Diagnostics IDX announcement. 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, and thank you all for joining us today for this announcement of a significant milestone for Integral Diagnostics. My name is Ian Kadish. I'm the Chief Executive and Managing Director of Integral Diagnostics, and I'm joined here today by Craig White, our Chief Financial Officer. We're excited to announce today that we've entered into a process deed in relation to a potential merger with Capitol Health. On today's call, Craig and I will provide you with an overview of the key elements of today's announcement and the proposed transaction, and also provide you with an opportunity to ask questions at the end of the call. Going forward on today's call, we will refer to Integral Diagnostics as Integral and Capitol Health as Capitol. First, I'd like to provide an overview of the process deed and the proposed transaction.
The proposed merger will transform Integral into a leader in diagnostic imaging across Australia and New Zealand, with a materially larger scale and enhanced clinical offering, and a greater ability to invest in growth. The process deed that we've entered into today with Capitol sets out the proposed terms of the merger and provides Integral and Capitol with an exclusive four-week period to complete reciprocal confirmatory due diligence, and to finalize an intent to binding agreement to implement the proposed merger. Capitol's board have confirmed that subject to the completion of confirmatory due diligence and entry into the implementation deed, each director intends to recommend to Capitol shareholders to vote in favor of the proposed merger. We are pleased to have reached this milestone in respect to the proposed merger.
Both Integral and Capitol have worked through a significant period of collaborative, value-confirming due diligence so that we could get to this point. This initial due diligence has affirmed that the proposed merger will unlock significant value, including more than AUD 10 million of cost synergies for all stakeholders of both Integral and Capitol, including patients, doctors, and shareholders. We believe now is the right time to come together, and we look forward to working closely with the Capitol team to agree and consummate this transformational transaction that will better position both of our businesses for the exciting future ahead. As the proposed merger remains subject to confirmatory due diligence and entry into binding documentation, it's important to note at this stage that there's no certainty that the proposed merger will proceed, or that the process deed will result in a binding offer by Integral or Capitol.
I'll give a brief background on Capitol Health. Capitol is a leading provider of diagnostic imaging modalities and related services to the Australian healthcare market. It operates 65 clinics in Victoria, Tasmania, Western Australia, and South Australia. It trades primarily under the flagship brand, Capitol Radiology, but also trades as Imaging at Olympic Park, Radiology Tasmania, Fowler Simmons Radiology, Women's Imaging, Direct Radiology, and the Future Medical Imaging Group. In financial 2023, Capitol generated approximately AUD 210 million in revenue. I'm gonna turn briefly to the strategic and financial rationale for the proposed merger before I hand over to Craig to review an overview of the offering and the next steps. We believe that the merger of these two businesses is compelling, logical, and a transformative opportunity.
The proposed merger will capitalize on the established standalone and complementary capabilities of both Integral and Capitol, and will create a market leader in the Australian and New Zealand's diagnostic imaging markets. There are five key strategic and financial benefits. First, the proposed merger provides Integral with significantly enhanced scale. It combines the two complementary footprints into a more geographically diversified portfolio. The enlarged footprint will span 155 clinics across all key Australian states, as well as New Zealand, and will be supported by 350 radiologists and approximately 3,000 employees. The combined group will have a materially greater financial profile, with more than AUD 650 million in pro forma FY 2023 revenue, and more than AUD 90 million in pro forma FY 2023 EBITDA.
Secondly, the proposed merger enhances our platform to drive best-in-class clinical outcomes for our patients, our doctors, and our referrers. We see this occurring through the deepening clinical expertise, the more advanced and innovative technology that we're able to offer, and with a stronger clinical governance framework. Our clinical expertise will be deepened naturally across the wider network. Our large network of radiologists and other specialists will promote greater subspecialty reporting and peer reviews to ensure the highest levels of service quality for our patients. In terms of technology, we will have a greater ability to leverage some advanced AI-enabled clinical technology. We have already seen technology-driven doctor productivity gains improve the accuracy and reduce turnaround times for patients across our network. There'll be significant opportunity to leverage this across the larger combined network.
In terms of our advanced clinical governance framework, it's something we've always been proud of and we've invested in at Integral. Through the proposed merger, we will further increase our investment into training, fellowship, and research opportunity for radiologists across the broader network to maximize clinical and financial outcomes. Thirdly, this is a highly attractive financial opportunity for both shareholder bases. As mentioned earlier, we've spent considerable time with Capitol to collaboratively work through value-confirming due diligence. A key part of the process has been to develop a robust view of the synergies available through the proposed merger. Following the detailed preliminary analysis of the synergy opportunity, we've jointly identified at least AUD 10 million of anticipated annual pre-tax net cost synergies.
We have very high confidence that we will deliver at least this level of synergies and believe that they can be delivered within the next two years, most of which will be delivered in the first year. Including the pro forma impact of these cost synergies, the proposed merger is expected to deliver double-digit pro forma EPS accretion to Integral shareholders in FY 2025. In addition, we believe there are also significant additional administrative and revenue synergies that will be delivered over time, including productivity improvements, new services, new contracts, and more cross-referral opportunities between the two entities. Fourthly, the combined entity will be well positioned for accelerated future growth. Through our larger scale, we'll have a materially improved ability to invest in costly higher-end imaging modalities such as MRI, PET, and CT.
We see higher modality testing as the key area of growth for the sector, and our ability to invest in these assets will be critical for sustainable earnings growth. We've talked at length about the significant impact that teleradiology continues to have across the industry. Integral is already a leading player in the teleradiology sector through our proprietary platform, IDXt. This merger will provide us with a significant opportunity to step change growth in our teleradiology volumes by offering Integral's IDXt platform to Capitol Radiology. Finally, if the merger proceeds, it would result in a pro forma leverage for the combined entity of 2.6x net debt to EBITDA on a post-synergies basis. We've seen, on an Integral perspective, our net debt to EBITDA decrease since December of last year, getting closer to 2.5 target that we've set for ourselves.
We expect the leverage to continue to trend downwards for the combined entity. Following the proposed merger, the improved balance sheet position leaves us in a stronger financial position to pursue further value accretive investments, including brownfield and greenfield growth investments, and also M&A, which is expected to continue across the sector. I'll just briefly comment on board and management arrangements. If the merger goes ahead, it is intended that I will be the CEO and Managing Director of the combined group. Justin Walter, the MD and CEO of Capitol, would be offered the transitionary role of Chief Integration Officer, whereby he would be tasked with driving the successful integration of the two businesses for a transition period of up to two years. As part of the proposed merger, two independent directors from Capitol would be invited to join the Integral board alongside all of Integral's existing directors.
I'll hand over to Craig now to take us through the overview of the offer, and then outline the next steps.
Thanks, Ian, and good morning, everybody. So in terms of the overview of the offer, under the terms of the proposed merger, Capitol shareholders will be offered 0.12849 Integral shares per Capitol share. I'll refer to this as the merger ratio. So based on Integral's last closed share price on Friday, the merger ratio implies an offer price of AUD 0.3264 per Capitol share. The offer price implies an enterprise value of AUD 413 million for Capitol, and based on broker consensus forecast, this represents a multiple of 10x FY 2025 forecast EBITDA before synergies, and 8.1x FY 2024 EBITDA when including expected synergies from the proposed merger.
Ian’s already discussed some of the synergies in the context of the strategic rationale, but just want to reemphasize that we’ve done considerable joint due diligence together with the Capitol team in relation to the synergies, and expect at least AUD 10 million per annum of pre-tax annual net cost synergies to be delivered from the proposed merger. As Ian indicated, the majority of that would be expected to be realized in the first year. Should the proposed merger proceed on these terms, Integral shareholders will be expected to own approximately 63% of the combined group’s ordinary shares. One other point, just to emphasize, as Ian mentioned, was that pro forma leverage is expected to be 2.6x net debt to EBITDA.
With Integral, consistent with what we've said to the market previously, Integral's standalone net debt to EBITDA leverage declining since 31 December 2023, and we'll obviously be reporting that when we report our full year results for 30 June 2024. But we certainly expect it to be below the 3x that we reported at 31 December, heading towards the targeted leverage of 2.5x, which is Integral's targeted standalone leverage position. In terms of next steps, as I mentioned, the merger process deed grants both parties a four-week exclusivity period to complete reciprocal confirmatory due diligence and agree binding transaction documentation in the form of an implementation deed. The implementation deed is expected to be subject to customary conditions and regulatory approvals for a transaction of this kind, including Capitol shareholder approval.
At the conclusion of the exclusivity period, if Integral and Capitol enter into binding transaction documentation, then Capitol shareholders will receive a scheme booklet and be entitled to vote on the transaction. We reiterate that the proposed merger remains subject to completion of due diligence and entering into binding transaction documentation, and as such, there can be no certainty the process will result in a binding transaction. Integral shareholders do not need to take any action in relation to the proposed merger. We will keep Integral shareholders updated in due course. This effectively concludes the overview of today's announcement regarding the proposed merger, and hand back to the operator now to open up for questions. Thank you.
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 Tom Godfrey with Ord Minnett. Please go ahead.
Oh, good morning, Ian and Craig. Thanks for taking my questions. Can you hear me okay?
Yes, we can. Thanks, Tom.
Great. Maybe if I could just start with the synergy. Can you sort of give us a bit more detail in terms of the assumptions that have gone into the AUD 10 million as a starting point?
Yeah, Tom, I think, as I said, you know, from a process point of view, we have conducted value confirming DD, and worked really well with the Capitol team to go through that in a lot of detail. As you would expect, you know, the lifted costs of having two entities listed go away. The biggest synergy will be headcount, but I just want to clarify that both organizations are gonna be very, very careful in terms of how we go around the merger to protect the culture of both organizations as we take out some headcount, where, as you would expect, there's obvious duplication that doesn't need to be there. And then probably the third bucket that I would call out would be in the area of indirect procurement.
So, everything from IT costs, including telecommunication, insurance, labor hire, travel, entertainment, and things of that nature. So those, those three buckets would form the majority of that AUD 10 million. But I think both, both ourselves and Capitol feel confident that there's at least AUD 10 million of annual net pre-tax synergies.
Great. Thanks, Craig.
Hopefully that provides you some clarity.
Yeah, no, that's helpful. Thank you. Just second question, just from a competition and ACCC perspective, is there any view just around Victoria that sort of feels like the only geography where there is any overlap for you guys? Do you think that'll be an issue, or just given Capitol's metro MSK versus your regional, it should be okay?
Yeah, Tom, look, I think on that point, we've obviously sort of mapped each of our clinics and, you know, we need to obviously just go through the process with the ACCC, but we don't see any issues there. As you, I think you've probably answered the question, essentially, Capitol and Victoria are predominantly metro based, whereas we're more regional. So it's a really complementary fit, and I think will be good for patients, doctors, referrers, and obviously in the wider context, shareholders.
Got it. And last one from me, be remiss of me not to ask just whether there's been any update around trading conditions for your business over the last few months?
Tom, I think, you know, if there was anything materially different to say, from what we said at the half year, we obviously would have said it. I think, you'll have no doubt seen the sort of the, the Medicare numbers. And so I think what we've said to the market at the half year, in terms of improving, you know, improving second half, an improvement in our EBITDA margin in the second half, which we called out at the half year, and also, a gradual reduction in our leverage in terms of net debt to EBITDA, are all things that we're seeing in the numbers. And, you know, we'll obviously provide an update to the market as we close out this financial year and release results, in August.
Great. Thanks, Craig. Thanks, Ian.
Thanks, Tom.
Your next question comes from David Low with J.P. Morgan. Please go ahead.
Thanks very much. Just a couple of ones for me. Just to, in terms of, you, you've talked about a net synergies number. Can I get you to talk a little bit about what costs you expect to incur with the integration?
Yeah, I think, David, when we're talking about net synergies, I mean, I think overall transaction costs will be in the order of AUD 10 million to effect the merger. When we talk about the net cost synergies, I guess what we've included in there are any costs that we expect to incur in terms of sort of dissynergies, that might be adjustments to remuneration both on the clinical and non-clinical side. And so that AUD 10 million is net of those additional costs.
Great. Understood. Thank you. Look, the only other question I had is, if things go according to plan, I mean, you've got a four-week exclusivity, what's the potential timing here for this to get settled on?
I think there's obviously a process we need to go through. I think both sides feel confident that, you know, this next four-week confirmatory due diligence process is a necessary part of the process, but very unlikely to change the result. I think in parallel with that process, obviously, you know, Capitol needs to go through preparing a Scheme booklet, obtain an independent expert report, go to a shareholder vote, and the like. So, you know, I think the expectation is it's gonna take a few months, so probably several months. Hard to give you a firm date at this stage, but all going to plan, though, yeah.
This calendar is, sounds like, what you're hoping for?
Oh, definitely this calendar, with, without question.
Okay.
Sorry, I, do I say sort of, we think, I think several months from today, and several usually means three.
Very nice.
I think that probably gives you an idea of the timeline that we're looking at.
Yeah. Perfect. Thanks. Look, just the only other question I wanted to ask is, there's a lot of activity in terms of M&A activity in the imaging sector, and so, Integral has this merger proposal with Capitol. Did you consider some of the other businesses at the sale and whether they would be as good a fit, or, you know, was Capitol just the most logical one?
Yeah, Integral is an excellent platform to drive continued consolidation in the sector. Capitol was just a natural fit given the geographic overlay of the two businesses, and the synergies that could be derived in the short term from a combination with Capitol. But we are, you know, looking at the rest of the industry, the rest of the sector. We think that scale today is more important than it has ever been in the industry. It's important from a technology point of view, it's important from a buying power point of view.
It's important to be able to have, you know, the optimal platform to attract and retain the radiologists and the key clinicians that are needed, and to extract all the benefits that diagnostic imaging can offer today, including nuclear medicine and PET scans, which is, you know, an exciting growth area for DI, and you need scale in order to get there. So I think that's the merger with Capitol provides us with both flexibility and the platform to drive further organic and inorganic growth.
I think if I could just sort of add to that, it's probably obviously the natural deal, but I think as we've talked about, you know, we're expecting strong operational cost synergies in the form of that AUD 10 million. But I think in addition to that, you know, the enhanced scale will naturally provide procurement synergies in terms of things like CapEx, IT, and the like, as we look to sort of bring those two, you know, the two groups together and leverage that scale. So I think, whilst we're calling out the operational cost synergies, I think we also see significant CapEx synergies as well.
Great. Thank you very much.
Your next question comes from Craig Wong-Pan with RBC. Please go ahead.
Thanks. Just with the lab information systems, I mean, are yours on different systems? Is there, are there plans on kind of integrating or moving to one system over time?
It's radiology information systems, and ours are standardized currently in each state, but we have invested in a middleware system called Clario, which allows us to report from any underlying radiology information system. So Clario, for Integral Diagnostics, has been a key piece of glue, if you will, to allow us to have IDXt teleradiologists report both internally for IDX across different platforms, and also report externally for external clients that IDXt provides services to. Capitol's systems are currently being standardized. So Capitol have standardized their systems in Tasmania currently. They're in the process of standardizing systems in Victoria.
And we are looking at whether we need to standardize our systems in Victoria to match Capitol's, or whether we just use Clario, which we have today, to interrogate Capitol systems without a need to change the underlying RIS. In Western Australia, we run off the same system. Our system in Western Australia is a system that Capitol is looking to move to. So it's really only Victoria, where there may be two systems going forward. But the other states we're, you know, fairly comfortable with the standard system within the state, which is IDX's strategy that's always been in place, and then using our middleware, Clario system, to report the underlying system. Most of the industry today, most of this industry in Australia, is moving to Clario.
So Clario is fast becoming a standard, whereby any radiologists are able to report using any underlying system. So, we don't see-
Okay.
You know, the net result of that, Craig, is that we don't see system disparity as being an issue for us here.
Okay, thanks. And then just with the EPS accretion, the double-digit, sort of expectation, I mean, I was having a little trouble getting there when I was looking at my two models of Capitol and IDX. I mean, is there any factors that we should be aware of, you know, when we're kind of looking at this transaction? Because, yeah, I was having a bit of trouble getting to that double-digit number.
No, Craig, I honestly can't think what it would be. I think we're confident that for IDX, we should see double-digit EPS accretion in FY 2025. I think with Capitol, from their perspective, takes a little longer. But look, I'm happy to sort of speak to you offline if you like, and just help clarify your number.
Okay. And then, thanks. My last question, just, Ian, you mentioned potential revenue synergies down the track. I mean, it's not kind of immediate, in the, in the short term, but sort of once, if the business is, if the transaction proceeds, could you sort of talk through some of those potential revenue synergies you were thinking about?
Yes. There are exciting opportunities on the revenue side, which are not included in the AUD 10 million, but which are real and able to be achieved in the fairly short term. So I'll call out some of the big ones, some of the more exciting ones there. Imaging at Olympic Park is a facility that has captured the high ground in terms of musculoskeletal imaging in Victoria and even further afield. They currently have two MRIs at that facility, one full, one partial. The partial MRI obviously becomes a full MRI on the first of July next year. And there's opportunity for even additional, you know, possible investment there in terms of a third MRI, which would become fully licensed right away.
Those MRIs are already doing, you know, pretty good volumes, but have the capacity with technology today to increase those volumes, and also, as I said, to introduce a further machine there. With our clinics that we have, we would welcome the opportunity to have an MSK center of excellence to be able to refer patients to. So MSK is a big part. Musculoskeletal imaging or orthopedic referrals are a big part of what radiology does, and the Imaging at Olympic Park site, in particular, is an exciting site. Similarly, Integral has a site, an oncology site in North Melbourne, where we would benefit from having Capitol Clinics refer their oncology work, their cancer work to our North Melbourne clinic. So there are nice opportunities for cross-revenue opportunities for the two groups in Victoria.
There are similar opportunities in Western Australia, in places like Bunbury and Busselton and Perth, where we have clinics that are in fairly close proximity, that specialize in different areas, and we can take advantage of the different specialties in the other clinics. We have a system at IDX, where we also have automated billing systems, where we have introduced automatic artificial intelligence into our administrative systems as well. We see an opportunity of rolling these out over Capitol, too, over Capitol admin areas as well, and extracting additional synergies there. The new licensing opportunity that has opened up for all diagnostic imaging, whereby partial licenses become full licenses over the course of the next few years, and then all MRIs can become fully licensed as from 2027.
Gives us an opportunity over the next three years, starting 1 July next year, for the 10 partial licenses at Capitol to become full licenses, for the seven partial licenses at MRI to become full licenses. And when Capitol's licenses, when their partials become full, it gives them an ability to service specialists as well as, as well as GPs. Partial licenses, as many of you on the call do know, service may need a GP referral, whereas full licenses are needed for specialist referrers, which Integral has a large number of. So once the Capitol MRIs are upgraded from partial to full, they'll be able to service Integral specialists as well. So there's some exciting opportunities, particularly over the next few years, that we see the two groups being able to offer each other.
Just one thing to clarify, that was 10 partial licenses for Capitol and seven for IDX.
Yeah.
Thanks. That's really helpful.
Your next question comes from Steve Wheen with Jarden. Please go ahead.
Yeah, thank you. Just a quick clarification on the comments around the ACCC. When the shoe was on the other foot and Capitol bid for IDX, did they provide any commentary at the time that might be helpful for understanding the way that might play out?
I think they did, Steve, and we can look back at that, the offer that was made in November 2017, December 2017, that period. And there was not a lot of concern. There was not much concern that I can remember that came from the ACCC over that time. Minimal, if any. And thinking of the location of the clinics that we've mapped out, of our group and Capitol's, the overlap is minimal. Capitol are, you know, in Southeast Victoria. We're in the west of the state, in places like Geelong and Ballarat, where Capitol does not have any presence.
And really, Steve, if you sort of think about it, since that time, since 2017, most of the IDX growth has probably happened in non-Capitol territories like Queensland, New Zealand, so really, the position shouldn't have changed.
Yeah, got it. Thank you. The second question was just to on the synergies, the net comment, you did mention the AUD 10 million of transaction costs. Obviously, you're not including any part of that as an offset to the synergies. Is that just to clarify that?
No, it's not in there from a synergy perspective, Steve, but we would've taken it into account in calculating the leverage number.
Yes, got it. And then the last one from me, I'm just curious as to whether there's any change of control clauses for some of the hospital contracts that Capitol has, and whether there's any implications there.
We're not across any at this point. There's a more detailed due diligence to be done over the next four weeks, but I don't expect there to be issues from that perspective. We have taken a look at some of their key agreements and leases to date, and there have been no issues on change of control that have been raised yet.
Just as an extension of that question, are there any that are up for renewal, from a point of view of tenders or a competitive process?
Not for the next few years.
Great. Okay, thanks very much.
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 comes from Dan Hurren with MST Marquee. Please go ahead.
Oh, good morning. Thank you very much. I was wondering if you could just compare the remuneration structures across the two businesses, and anything that needs to be done to harmonize them?
Yeah, I'll perhaps can comment on that one first. You know, we have taken a look at that as part of the sort of phase one value confirming due diligence, and essentially, there's not major differences in quantum across the two businesses. And so we don't see that as being a sort of a significant issue as we bring the two businesses together.
Thanks. Just on the transaction costs, apologies if I've missed this, just the timing of those. When will those transaction costs spill into 2026 or all be done in 2025?
No, they'll all be in 2025. Well, sorry, they'll be finished by 2025. There'll be, you know, some in FY 2024, but so the majority would fall into 2025.
Great. Thank you very much.
There are no further questions at this time, and I'll hand it back to Dr. Ian Kadish for closing remarks.
Thank you very much, and thank you all very much for participating in the call and the question and answer session. For Integral Diagnostics, the business and our shareholders, we're incredibly excited about the opportunity it presents for our doctors, employees, and shareholders, and look forward over the next few weeks to discussing these with you in further detail. The wider industry is undergoing a lot of activity right now. Integral is positioned in an exciting place to be able to benefit from the changes in diagnostic imaging that are happening now, and that are expected over the next few years. So, thank you all for your time today, and we look forward to engaging with you over the next few years. I'll hand over to Craig too, just to make the closing comment.
Yeah. Thanks, Ian. Look, I think just off the back of Ian's comments, just probably want to reinforce some of the financial aspects of the transaction. I think, you know, we've spoken about the AUD 10 million of pre-tax annual synergies, the confidence that we feel around extracting those synergies, majority of those synergies within the first year. That effectively, when you look at the transaction from an IDX perspective, on a pro forma basis, it effectively implies an 8.1x EV to EBITDA multiple, including synergies. And we've talked about. That 's in FY 2025.
And we've touched on, obviously, the pro forma leverage of 2.6x , the expectation that that will further reduce and improve over time, which I think will position the combined group really well, both for further organic and inorganic growth.
Thank you all very much. Appreciate your time this morning.