Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dr. Colin Goldschmidt.
Thank you very much, Josh, and good morning and good day to everyone on this call. I'm Colin Goldschmidt, CEO of Sonic Healthcare, and I'm joined today by my colleagues Chris Wilks, Paul Alexander, and Dianne Ayers. It's a pleasure for me to present the half-year results of Sonic to December 31, 2023. If you can go, please, to slide three where we'll start, which is showing our headline numbers. And first of all, our revenue number at AUD 4.3 billion is 5% above the corresponding period last year. But of course, that now is not truly comparable to last year because of COVID revenue, which was present in the previous period. But if you exclude COVID and take our base business revenue, the growth is 15%.
And I just wanna call out at this point that the comparatives against the previous period are not entirely pertinent because of the difference in COVID revenue between the two periods. Our EBITDA number at AUD 737 million for the half is in line with the guidance we provided at the AGM last year. And we are on track to achieve our full-year EBITDA guidance, and we are pointing to it ending more likely towards the lower end of our guidance range. If you look at base business organic revenue growth, the number for the half is 6.2%. And a further headline on this first slide is that we are full steam ahead with cost reduction programs right around the company. A standout feature of this period is the approximately AUD 500 million—that's Australian dollars—of new annual revenue that's been added, which has come from acquisitions and contract wins.
In fact, this feature is very much a standout feature of this results release. There are further acquisitions and contract opportunities under consideration. If you go to the next slide, and I'm gonna point you straight to the chart because it is quite informative. And first, I need to say that the numbers in that chart represent actual reported revenue numbers, and they are by half. So first of all, just looking at the base business, between this year and last year, that's the blue bars, the 4.27 over 3.70 represents the 15% growth in revenue on the previous slide. The base business revenue growth for the half, and that's H1 2024 versus H1 2023, is 15%. And if you look at the scale over four years, you'll see that we've added something like AUD 1 billion in revenue in H1 revenue only. So that's the 3.34-4.27.
If you extrapolate that to full-year base business revenue, and I would take you back to FY 2019 because that's the first or the last year with no COVID revenue in it at all, I think back in 2019, the revenue was just over AUD 6 billion. If you take consensus for FY 2024, which is over AUD 8.5 billion, you'll see that we've added something like AUD 2.5 billion in revenue over five years. That's an increase of more than 40% in base business growth. Forget about COVID. You'll also notice from the chart going to the red bars that COVID revenue is just about disappearing. Our base business revenue growth trajectory has significantly strengthened more recently. I definitely point to this fact as a sign of very good health and underlying strength of Sonic Healthcare.
Actually, this chart gives a good general overview of Sonic Healthcare, as we stand now, just looking back over the first of the last few years. Firstly, you can see in this chart the tremendous growth that we experienced from COVID testing. We knew that growth was gonna be temporary. Then COVID revenue disappearing, and its replacement by strong base business revenue growth, which we know is permanent. The recent strong base business growth is not just from M&A, but it's combined with strong organic growth. Both of these are very much driven by Sonic's adherence to medical leadership and the very high-quality services that are integral to that culture.
So you get a good look at just the recent past and everything that happened during the pandemic and how we've come out of that, and replacing the COVID revenue with very strong base business growth, which we are confident is gonna continue into the future. Onto the next slide in our guidance. As I mentioned, we maintain our EBITDA guidance as issued in August of last year at AUD 1.7 billion-AUD 1.8 billion. And our impression at this stage is that the EBITDA will land up closer to the lower end of our guidance range. There are a number of factors that have influenced this. First of all, the Belgian fee cut that came in on 1 January, 2024. There's been currency exchange headwinds since August 2023. We've acquired PathologyWatch in January 2024, loss-making.
There is a positive factor in this, and that's the impact of the delay of the U.S. PAMA fee cut. Our net interest expense is higher than we predicted back in August 2023, mainly due to additional acquisitions but also an increase in base interest rates and also the AASB 16 leasing adjustments due to higher interest rates and rents. The tax rate is likely to be approximately 27% for the year. Of course, our guidance still assumes current exchange rates and interest rates prevail. The next slide, which is slide six. Now, at November's AGM, we did alert to a more accentuated H2 versus H1 earnings ratio. As you are familiar, the normal seasonality is something like 46%-54%, H1 versus H2 in terms of earnings. This will be more accentuated for the reasons in those sub-bullet points.
Firstly, strong organic revenue growth in the setting of tight labor cost control. Now, that's just one little bullet point, but it's a major point for the entire company. In our business, when we are experiencing strong organic top-line growth in the setting of a very tight and almost unique labor cost control setting, there is a great opportunity to grow margins. So the ongoing workforce reduction programs, to right-size the company post-pandemic, continue. They are not yet complete but certainly well advanced and well underway. It's a difficult one to explain this, but it was a huge challenge for the company, given the massive growth that we experienced, very suddenly as a result of the pandemic where we had to put on so many additional staff to deliver the services that we did.
Then, the synergies that will come from recent acquisitions, and particularly SYNLAB Suisse in Switzerland and MLD and Diagnosticum in Germany. We've got an additional three months of the Diagnosticum acquisition. It settled in October 2023. So we will only have three months in the first half but six months in the second half. There's contributions from recent smaller acquisitions, specific large procurement deals which are already completed, more recently, we're in train in a program to rationalize our collection center infrastructure in Australia. And the initial contributions from our enhanced revenue collection system in the U.S.A are beginning to come through now and will escalate, starting in H2 but going into FY 2025 and beyond. And also acquisition costs of AUD 8 million in H1, which will be lower in H2.
Moving on to the next slide, and this table perhaps serves as something of a bridge from the present situation to the near future and specifically, highlighting the earnings potential that lies ahead from recent acquisitions and the major contract wins that we have achieved. I think the big feature of this table is the addition of AUD 500 million of new annual revenue that will come from these acquisitions and contracts. And just to quickly go through them, in Germany, there's MLD, Medical Laboratories Düsseldorf, Diagnosticum Laboratory Group, and four smaller acquisitions. And if you total those up, that's more than AUD 250 million. In Switzerland, the big SYNLAB Suisse acquisition and Pathologie Enge, that's almost AUD 200 million. In the U.K., we have one, a new NHS contract, the Whittington Health NHS Trust contract. And there is more to come there.
Firstly, the Hertfordshire and West Essex contract. And the execution of that contract is imminent, and its magnitude's bigger than the Whittington Health NHS Trust contract. And then in the U.S., the acquisition of PathologyWatch, which we have down as U.S. revenue, and it is U.S. revenue, in the first instance. So we are rolling out PathologyWatch in the U.S.A. But of course, PathologyWatch will be applied globally, across all our skin pathology, dermatopathology around the world. And so when you add to this table our strong organic growth to the AUD 500 million, we're in a very strong growth phase right now. I think it's perhaps unparalleled in Sonic's history. Moving on to the next slide.
Having shown the table, I think it's appropriate, and I guess another good segue, to consider the strong revenue growth in terms of or as a means to drive future earnings. A few points on our earnings drivers, which will start in H2 of this year but will certainly extend into FY 2025 and beyond. Firstly, the ongoing strong base business organic revenue growth and the operating leverage that comes from that, that's absolutely integral to our very basic business model. And so, we're extraordinarily pleased that we've come out of the pandemic in a big way, and particularly at organic revenue growth level. Then secondly, the additional revenue and earnings that have come from recent acquisitions and contract wins. And specifically, to mention SYNLAB Suisse, which is a big business, AUD 175 million, which we bought at low to zero margin deliberately.
So this is a business which will convert, let's say, from zero earnings or margin to perhaps 20%. And if you calculate that, you're talking roughly AUD 35 million, and it is growing already in our hands. AUD 35 million-AUD 40 million of EBITDA will come from just that one acquisition. And we are very confident through our excellent teams in Switzerland to achieve that within the space of one to maybe a bit more years. Then, the acquisition of PathologyWatch, we expect significant revenue growth and efficiency gains from this digital pathology platform. It's important to note that this is not just an efficiency tool but one that can really drive growth in the dermatopathology market sub-market, not just in the U.S. but also globally.
Then, the synergistic acquisitions that we've made in technology, and we call them diagnostic technology investments because the and this includes PathologyWatch, Harrison.ai, and Microba. These are not just any technology acquisitions. They are all directly in our space, and will add value directly to our core business. Important points to make. And then, just the final two points, the rollout of our enhanced revenue collection system in the U.S. is in progress, and we expect material upside to accrue starting in FY 2025. And we do have now fee indexation in various markets and contracts, including Radiology U.K., Belgium, and Sonic Clinical Services. The board of Sonic has ratified an interim dividend of AUD 0.43 per share. That's 2% up on H1 FY 2023. It maintains our progressive dividend strategy. This dividend is unfranked following our fully-franked dividends of 2023, record date 4 March, payment date 21 March.
The next slide is on capital management. It's an interesting one. We've shown this chart, a number of times now. I guess the standout feature is, the return of our debt cover, or the return trend of our debt cover towards our long-term average of just under 2.5 x. Our debt has obviously increased, the net debt, by just over AUD 1 billion, largely due to the acquisitions that we've just mentioned. But we still have current available headroom of approximately AUD 1.5 billion before the interim dividend is paid. Our balance sheet remains extraordinarily strong and well-positioned for future acquisitions and other growth opportunities. The next slide shows our traditional revenue split pie chart. Compared to, say, a year ago, I think the only significant difference obviously, the whole pie has expanded quite significantly, total revenue AUD 4.3 billion.
Switzerland has increased its share of the pie and is now sitting at 10%, which is really good news. I think it was about seven, excuse me, or maybe eight, a year ago. And there's potentially more growth to come in Switzerland. You'll notice that the bulk of our growth is occurring in Europe, which is really good news. And as I have flagged before, the Australian lab segment of this pie chart, which currently sits at 24%, is likely to get smaller and smaller as the years progress. I'm going to whip through the country slides, so that we can get to your questions sooner. So and just give a few headline points. Firstly, on the U.S., our base business organic growth was 4% for the half. At operational level, we've implemented our enhanced revenue collection system. We plan a full national rollout of XiFin.
And we have piloted the product in our smaller divisions with very encouraging results to date. So we look forward to significant upside, which will be at revenue and bottom line levels, from this rollout. Our ThyroSeq test, which is our exclusively licensed thyroid cancer genetic test, continues to fly. Growth is incredible. One test run rate revenue is something like, or it's very high. I don't know if I should mention numbers. And as I've mentioned, the acquisition of PathologyWatch, our initial deployment is in full swing in the U.S.A. And we have created a new dermatopathology division which has revenue in it of approximately AUD 200 million. And we have a lot of optimism for the benefits that will flow from PathologyWatch in this new dermatopathology division. Australian pathology on slide 13 is growing incredibly strongly at 9%. That's base business organic growth.
Excuse me again. At operational level, this organic growth is outperforming historical rates. We believe we're taking market share. We'll wait to see what competitors say. But we're certainly significantly above the Medicare growth rates. We don't believe this is simply a COVID bounce. This is ingrained strong growth, particularly in our strength in the specialist sub-market and hospital-referred sub-markets. And we expect that to continue for a long time to come. We're also experiencing strong growth in genetic testing. A particular callout to the one test that's now received Medicare funding, that's reproductive carrier screening, which is a test for three inherited genetic abnormalities. That test is growing enormously. And, you know, it's like it's one of those great tests, a bit like ThyroSeq and Oncotype DX, which we'll come to. We don't know where that's gonna go.
I think there will be more and more of these high-end tests which Sonic Healthcare is so well-equipped to offer. We've won a new contract at the Ramsay Health Care Pindara Private Hospital on the Gold Coast in Queensland. Operations have commenced there. As I mentioned earlier, we're now well into a program to rationalize our collection center infrastructure in Australia. Also, we are lobbying intensively through the Pathology Industry Association for indexation of pathology fees, which have basically not gone up in 25 years, no indexation of pathology fees for 25 years. There is a campaign afoot that some of you might have heard about. We're hopeful that we get some positive response, possibly even in this year's Australian federal budget, which is in May. Moving on to Germany. Again, base business organic growth rate is particularly strong, running at 8%.
And like Australia, we have continued strong growth coming from specialists and hospitals. This includes anatomical pathology, molecular testing, microbiome testing, and genetic testing. These are all high-end tests, as opposed to the routine testing that we do as well. I mentioned Oncotype DX. We are the exclusive providers of Oncotype DX in Germany. The growth is particularly strong in that test as well. The acquisitions that we've made, we are well-advanced with the synergies that will come from these acquisitions, in the near and medium and long term. We're also participating potentially as a lead player in the consolidation of the anatomical pathology market in Germany, focusing very much on synergies that will come from automation in anatomical pathology and especially digital pathology and AI. You know, this is where the PathologyWatch acquisition will tie in at some point in the near future.
Procurements continue to add value in Germany. We've recently completed a number of deals with some success. The base business moving on to Switzerland, the base business growth there has been at 4%, which has been impacted by the fee cut, which commenced 1 August, 2022. So, we're pretty pleased with that 4%. At operational level, obviously, there's a lot of attention onto the SYNLAB Suisse acquisition, with a huge amount of activity already well underway. We just mentioned here that we have rebranded SYNLAB Suisse to the name Medisyn, which is a play on MediSupport and SYNLAB, a mix of the two, and, of course, medicine. Quite a nice name.
Really, in Switzerland, we're now the number one player, with three large, essentially federated members, three brands that are being brought together, the three brands being MediSupport, Medica, which is largely Zurich, and now Medisyn. Our efforts are now to integrate these and to get the required synergies and improve performance out of the entire operation. Very exciting what's going on in Switzerland. In the U.K., on slide 16, our base business organic revenue growth is at a very healthy 13%. It's coming from both the NHS and private markets. I've mentioned that we've been awarded the 10-year contract for the Whittington Health NHS Trust. We're the preferred bidder on Hertfordshire and West Essex NHS Trust. The contract execution is now imminent. There are further NHS contracts under consideration and negotiation at the moment.
In Belgium, on slide 17, our base business organic growth is 6%. We suffered a 15% cut to the national fee schedule, on 1 January, 2024. That was partially offset by an indexation increase of 6%. We're working to mitigate the effect of that fee cut through a variety of measures, particularly automation and other efficiency gains. Slide 18 is our radiology division, which is performing, amazingly well. Organic revenue growth is 11% and EBITDA growth of 19% and margin accretion of 160 basis points. Incredible performance from this division. It's coming from outstanding divisions and radiologists and staff, all under Sonic's medical leadership, culture. But we are investing in Greenfield sites, Brownfield sites, and, really, riding the wave of this trend towards higher modalities in radiology. That's MRI and PET/CT, essentially.
We've commissioned a new PET/CT site in Brisbane in the first half and another three are planned for the second half. There are five new Greenfield sites planned for the second half of this year. We are also using AI applications, principally Harrison.ai's Annalise products, within our businesses to enhance workflows and clinical outcomes. As you know, Annalise has released an amazing chest X-ray tool with a CT brain tool to follow very shortly. Sonic Clinical Services, that's our primary care division in Australia, revenue growth 12% and organic growth 4% with EBITDA growth of 9%. The organic revenue growth reflects two main factors, one, an increase in our private billing. That means above the Medicare government rate. Also the targeted fee increases, which commenced on 1 November last year, which have been applied across the board.
We're also ramping up all our operations to service the new Australian Defence Force contract, which involves pre-recruitment medicals for the ADF. Going to end the last two slides on digital pathology and AI. Just to set the scene, just a couple of definitions, if you don't mind, because there is some confusion about the terminology. So anatomical pathology is defined as the study of organs and tissues to determine the cause and effect of disease. It is the tissue that's usually cancers that are studied for cause and effect. Anatomical pathology is necessary for 100% of all cancer diagnoses. So these are important points because anatomical pathology is an essential part of the laboratory, the whole laboratory industry or pathology space. And Sonic is one of the biggest players in anatomical pathology in the world.
Digital pathology refers to the digitization of anatomical pathology workflow. This digital pathology and AI are set to transform anatomical pathology and bring about big steps in efficiency, quality, capacity, and workflow. The diagram that you have with you gives a quick explanation of what digital pathology actually is. On the left, we have a Sonic pathologist at a microscope with a tray of slides sitting beside her. That's the system that's been in place for a long, long, long time. Now, radiology has already long ago digitized their workflows and their processes.
But in pathology, it's happening, about to happen, whereby we take that glass slide that would normally be placed on the stage of a microscope, we digitize that we scan the slide, that's the scanner below the arrow, and digitize it to provide a whole slide image to be viewed on a screen, which you see on the right-hand side. This is a revolution in anatomical pathology and one that we are keen to be absolutely at the forefront of. I believe we are. So going to the last slide of the presentation, just to reemphasize that Sonic Healthcare is one of the world's largest, if not the largest, anatomical pathology providers, we have annual anatomical pathology revenue in excess of AUD 1 billion. And we employ well over 1,000 anatomical pathologists around the world.
So it's probably not surprising that we are keen to become leaders in this space. And as a result, we are making significant investments in digital pathology and AI to unlock upside potential opportunities and also to drive revenue growth in this space. And the two major investments that we've made in this space are PathologyWatch and Franklin.ai. So PathologyWatch, as we have announced before, is a unique product. It's an end-to-end digital pathology platform incorporating all the necessary components that are needed to go digital. It's been designed specifically for dermatopathology, skin pathology. But of course, it can be used for all the other disciplines or systems in the body where we also do anatomical pathology. So the first port of call is the U.S.A. We have a large dermatopathology operation, as mentioned, in excess of AUD 200 million.
We are in the process of adapting PathologyWatch to digitize our dermatopathology and to use the tools in PathologyWatch to our benefit, both in terms of quality and services and also financials. So what it'll do, PathologyWatch, is actually accelerate Sonic's transition to digital pathology globally, first in the U.S., probably second in Australia. And we'll commence with dermatopathology, which is a large proportion of the entire anatomical pathology space. So something, just in excess of 50% of all cases that's not slides, but cases are skin pathology in the whole anatomical pathology space. PathologyWatch also has an AI algorithm built in, for, for skin pathology. And it has been working and is well-advanced on an AI algorithm for melanoma. So this is a prognostic algorithm for melanoma. So there's blue sky upside, on the side, not part of, everyday operations.
There are significant synergies that we've already identified between PathologyWatch and Harrison.ai or Franklin.ai. And moving on to that joint venture, that's Sonic with Franklin.ai. As you know, Franklin.ai is in the process of developing an AI tool for prostate cancer, is the first product. And there will be many more to follow. And we're very excited about this particular product because validation studies will be taking place very shortly. And it's fully supported by Sonic's pathologists globally. And we plan to employ the Franklin.ai product, the initial one and subsequent ones, within Sonic and to sell and commercialize these products globally. So, I just want to reiterate as we end that this is really the exciting end of where we are at the moment, where a big part of what we do is being digitized.
It is going to represent a revolution for us and set to bring in huge benefits, in this important space of pathology. So thank you very much. Josh, I'll hand back to you, so that we can take questions. Thank you.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from David Stanton with Jefferies. You may proceed.
Thank you very much. And good morning, everyone. Thank you for taking my questions. Just want to start with one, maybe, for Chris and for Paul. First half depreciation was about AUD 343. Should we be expecting that level of depreciation for second half as well?
Is there any reason why it should be lower or indeed it probably should be higher going forward?
Dave, yeah. Look, I think it is a good proxy for a run rate for the second half and going forward, affected, obviously, by the M&A, a bit of forex. That could have a bit of an effect, depending on what happens between now and the end of the year, on forex . And I guess I'm hoping that the growth rate for that going forward into FY 2025 because some of that effect in depreciation these days, as you'd know from AASB 16, is the flow-through of rents, partial flow-through of rents, which, I guess, in the last year or so, we've had the CPI impact. And I think in nearly all of our markets now, the inflation rate is kind of 3% or below.
So I think the effect of the kind of rental increase on the depreciation number will abate from 2025 going forward.
Very good. Thank you. And my second and final question, could you talk to the contributions that acquisitions made that you've outlined to first half FY 2024 EBITDA? And what should we expect, I guess, in terms of EBITDA contribution from those acquisitions in the second half, please? Thank you.
Paul, do you want to take well, Chris?
Yeah. Look, there's a bit of a mix there, Dave, because you're aware that SYNLAB Suisse was about break-even at EBITDA and a bit loss-making further down. And so that's a work in progress. As Colin mentioned, there's a whole lot of activity to bring synergies through. And so we're hoping that probably in the second half, we'll see some bottom-line contribution.
There is some contribution, obviously, from the some little acquisitions that have happened at the end of the year. So there's probably, you know, AUD 5+ million coming from them. And then there's, obviously, the contribution from the bigger German acquisitions, which we haven't actually disclosed specific numbers, but you'll be able to work out from the announcements that we made when we announced those deals.
So, Dave, in summary, I think if you look at the dates that these acquisitions were made, the vast majority are not in H1. There are some, so for example, MLD, Medical Laboratories Düsseldorf, there is that was July of last year. So that's in. But the rest of them are either not in at all or only partially in.
So Diagnosticum, as I mentioned, you've only got three months. We're going to get six months in the second half. SYNLAB Suisse, basically zero in H1. And everything else will flow much the same with Enge. And the Whittington, the contract in, in the U.K. and hasn't yet started. So nothing in H1. And PathologyWatch, essentially, hasn't happened and will start happening now.
Yeah. We should probably we mentioned that PathologyWatch, I think Colin touched on it, is loss-making. So it's, it'll have a slight negative effect on the second half. But with a whole bunch of work that's going on there, including swapping them from their relatively poor contracts to our contracts, just that move itself will go close to bringing that business to break-even during the course of the second half.
And then, beyond, there's the various contributions it'll make through efficiency, revenue growth, and the like that Colin's alluded to.
Understood. Thank you.
Thank you. One moment for questions. Our next question comes from Gretel Janu with E&P. You may proceed.
Thanks. Good morning. I just want to start with Pathology EBITDA margins. So if we rewind six-12 months ago, you had talked at that time that Pathology margins had stabilized. Yet we've continued to see a further step down sequentially in the Pathology margin in first half 2024. So what exactly has driven this relative to your prior expectations? Has it just been the high labor inflation and cost inflation? Have you not been as successful in reducing those higher COVID labor costs? And I guess going forward from here, is this now the bottom?
And how should we think about the trajectory of margin improvement going forward? Thanks.
Thank you for the question. Yeah. Gretel, yeah. Look, there are a few factors at play, obviously, the main one being the reduction in the relatively higher margin COVID revenue. There's a little bit with some lower margin acquisitions, being particularly the SYNLAB acquisition. And you're right. There's been some inflation pressures on salaries, partially offset by a bunch of initiatives that Colin alluded to. But I think it's fair to say that our view is that this is probably the bottom. We believe it's the bottom. And if you look at where we're guiding for the second half, you'll see that the margin in that period will be significantly higher than the first half. And the average of the whole year is not too bad.
It's probably a couple of hundred basis points below where we were pre-COVID. But with all of the M&A and the synergies that come from that and the leverage effect of the strong revenue growth, I think we're pretty confident that we can claw most of that back over the next year or two.
And just in terms of the stronger second half margins, so what is really driving that? Is it just the stronger topline? Or have you seen anything else flow through on the cost lines?
Well, it's a mix of the points that Chris makes. I mean, the big one is the very strong topline growth, especially organic revenue growth.
But if you add to that, further reductions in our cost structures so, while there is inflationary pressure on salaries, we are moving to right-size the company and reduce headcount. And that will continue. Plus, there's now a moderation of those inflationary pressures, particularly on salaries. As Chris mentioned, I think, you know, the interest rates appear to have stabilized. And therefore, there'll be less pressure on salaries going forward. And this was quite an exceptional period or year in that respect.
There's also yeah, the synergies from the M&A, some procurement things. I think slide six, you know, gives you a bit of a list of some of the things that will be different in the second half versus the first half.
And Gretel, just on the wages expense, we do reference in the 4D that if you exclude M&A and FX rates, the labor expense has gone up 3.8%, which is obviously a combination of less FTEs, but increase in rate in that period.
Thank you. That's very comprehensive. And then just in terms of the rationalization of collection centers, in Australia, how much are you looking to rationalize? And why now? Is it just because you want to have a stronger presence in the specialty market and wanting to reduce further your exposure to GPs? Thanks.
Yeah. So, Gretel, we have enormous exposure to general practice, even though we do call out our special strength in specialists and hospitals.
You know, it's a story about what's happened over the last five-10 years where collection centers have proliferated enormously, including into most medical centers. And there was, I guess, a rationale that was potentially a way to drive revenue. But you know, over time, things have changed. Costs have gone up, for all players. And many of these colocated collection centers - that means a collection center in a GP practice or surgery - are perhaps getting to the point of being marginal. So, if you can set up a, you know, standalone collection centers close by, it's probably, at this point in time, becoming a better proposition to think about rationalizing the great excess of collection centers that we have. And so I think we're very much at that point and doing it, obviously, very carefully.
But I think it's going to yield benefits to Sonic. And so this is not something we're doing to lose topline and bottom line whereby the net result is negative. That's not going to happen. So we've been very, very careful about this. And we do hold strong positions in all our markets with referring doctors. And we think that that will come to our advantage.
Thanks very much.
Thank you. One moment for questions. Our next question comes from Lyanne Harrison with Bank of America. You may proceed.
Yeah. Good morning, all. If I could start with the U.S. Revenue Enhancement Project, obviously you made some comments today about that progressing. But previously you talked about the upside being in the vicinity of about $1 billion in 2025 financial year. You know, can you comment on that? Does that number still hold up?
You know, if that's a revenue benefit, can we expect most of that to fall through to the bottom line?
Give it to Paul .
Yeah. So look, our expectations from the XiFin system haven't changed. So we still have the same expectation. The $1 billion was the amount of our U.S. revenue that XiFin is being applied to. So that's largely our clinical laboratory operations in the U.S. Our anatomic pathology operations in the U.S. are using a different system that we may change at some point, but it's not in the short term, whereas our clinical labs, you know, is a short-term project. So what was said, you know, six months ago was that we expect to achieve something in the order of 5%, maybe a little better than that, on that $1 billion, once we've fully rolled out the system.
Okay.
Thank you.
And that will be top and bottom line.
Okay. Thank you. And then, if you could talk about that first anatomical pathology project that's in conjunction with Franklin.ai. You know, in terms of, you know, the validation study, you mentioned that that will be, you know, completed 2024. And you'd get, you know, that launched in that time period. Is that expected this half, or you're referring to calendar year then?
I'm referring. I don't want to be too specific about this, but it's going to be commencing very shortly. So it might be straddling both. So it, it we're definitely starting H2 in the financial year. Whether it goes through into the latter part of the calendar year, I can't say at this point.
But we are hopeful that this will be achieved very, very soon and in a short space of time because all indications are very positive about this product. So we'll, you know, obviously keep the market informed. And I'm sure Harrison.ai, which is Franklin.ai's parent, will also keep the market informed about this product, as it goes through its final validation steps.
Okay. And if we think about the launch timing across different geographical regions, is it likely to be simultaneously or sequentially?
Cannot answer that question at the moment. I mean, we'll probably start with Sonic labs and then move beyond that to commercialize the product globally. And of course, you know, well, none of this has been announced to the market yet. So best that I not say anything further.
Okay. Thank you very much.
Thanks.
Thank you.
One moment for questions. Our next question comes from Saul Hadassin with Barrenjoey Capital. You may proceed.
Yeah. Thanks. Good morning. Just a quick question. You've, you've mentioned the sort of the second half weighting for EBITDA. I'm just wondering if you can also give us a sense of the weighting for the revenues as well.
Well, we haven't specifically, oh, sorry. We haven't put that in writing, so we can't be too specific about it. But, you know, there is a, a, a normal seasonal weighting of revenue to the second half. It's not as acute as the weighting at EBITDA. But there is, you know, there, there certainly is a weighting there. I think if you could, you know, if you go back in our history, you can probably work it out for yourself in general.
Obviously, this time, it's accentuated because of the timing of acquisitions this year.
Yeah. So Paul, on that basis, if I use a sort of a slightly heavier weighting to second half versus seasonality, I guess the implication is that the EBITDA margin that Sonic needs to deliver to get to the full-year guidance at the bottom end is about a 200 basis point implied EBITDA margin step up from 1H 2024. I know Chris talked to the margin-enhancing measures that are in place. But do you think that's a realistic outcome just based on the revenue seasonality and the cost out that's taking place?
That's absolutely our expectation. Hence why we've reconfirmed guidance. Not commenting on the specific number you've put out there. But as Chris mentioned before, we certainly are expecting a margin uplift in H2.
Then just finally, looking at the, if I take the bottom end of your EBITDA guidance, again, and an estimate of the revenues, I think it translates to a group margin, EBITDA margin of roughly 18%. If I go back to first half 2020 pre-COVID, the group did 21%. What's the expectation in terms of the ability to close that gap back up to that pre-COVID margin?
Yeah. Look, so I think I touched on that in answer to an earlier question. So I think with the position as it looks for the full financial year 2024, we're probably a couple of hundred basis points behind where we were in pre-COVID. And bear in mind, you've got to adjust for AASB 16 effects and all that sort of stuff.
But I guess we're pretty confident that into 2025 and 2026, barring anything unexpected, that if we maintain growth rates of 5%-6%, which is great for us, the marginal profit that can come from that sort of organic growth combined with the synergies coming from the M&A, and the cost out regime, and I should say that the reduced pressure that I expect we'll get on labor because, you know, most of our markets probably Australia's the highest, still at sort of 4%-odd for CPI. But all the rest are coming down and still reducing. I think the pressure on labor costs going forward will abate as well. So all of those factors together is quite positive for our business, for margin. Excuse me.
I mean, if you think about just the SYNLAB Suisse acquisition, in this half, it's something like a 50 basis point dilution to margin. And as Colin touched on in his presentation, we're expecting a very significant increase in profitability in that business over the next couple of years. So, you know, that as one anecdote, that's where some of that uplift will come from.
Yeah. No. That makes sense. I'm reflecting back on a year ago when I think commentary was, you know, base business margins were effectively back to pre-COVID levels. It seems like it's going to take a longer period of time, albeit with some dilutive acquisitions, sure. But it does feel like the OpEx growth has been a bit more excessive than maybe what was expected. But that's fine. Thank you.
Thank you. One moment for questions.
Our next question comes from Laura Sutcliffe with UBS. You may proceed.
Hello. Thank you. First question is just around some of the increasing lease costs that you mentioned. Could you just give us a bit more color on where those are rooted? So for example, is there anything geographic that you've noticed? Is it that you are leasing things that previously you might otherwise have bought? Or is it just a rates consideration?
Yeah. Laura, it's probably more that when I was referring to rents, I was talking about our property rentals, effectively, which tend to have clauses of, you know, something like 2.5%, 3%, or CPI, whichever's the higher. And so with CPI quite high, particularly here and in other parts of the world, that was flowing through in the rent cost, which then appears in depreciation and interest.
With inflation abating, then we'll see a reduction of that impact going forward.
Does that make sense?
All right. Thanks. And then yep. And then second question is just back on the anatomical pathology piece. You mentioned you have about AUD 1 billion of revenue that sits in that bucket. Do you have a good sense of how that positions you versus large competitors internationally in terms of size?
Unfortunately, we don't, Laura. You know, I think we can say confidently that we're the number one player in Australia. And we're probably the number one player in Switzerland. The anatomical pathology market share in the States is very hard to determine. As you know, we bought an entire anatomical pathology company. That was the Aurora practices, which boosted our anatomical pathology in the States dramatically.
But I don't think our big competitors actually separate out their anatomical pathology revenue. So it's very hard to say. I, you know, I guess we could just say it's a major part of our business and always has been because it goes so closely with the medical leadership culture within Sonic.
All right. Thanks very much.
Thank you. One moment for questions. Our next question comes from Andrew Goodsall with MST Marquee. You may proceed.
Well, thanks very much for taking my question. Just sticking with the margin questions for a little while, particularly those U.K. contracts, just wondering the sort of cadence of the margin opportunity there. Is it sort of start pretty low before it actually increases? And maybe just quickly, while I'm there, just obviously we know you've got the Whittington one.
But just wanted to confirm that with the Hertfordshire and West Essex, that the complaint on the process there has been resolved. And therefore, you've got a green light there.
So Andrew, the answer to the last question is, yes, it has been resolved. And that's why we're able to say that execution is imminent. Execution of the contract is imminent. I think in general, your statement is correct that, when we take over these contracts, we take them over at a margin and then work to improve them. Given that we have a large, modern, comprehensive lab in central London, to assist in achieving synergies, that's generally what has happened with our other contracts. In the Hertfordshire and West Essex contract, there's going to be enormous potential to drive synergies and margin accretion. But it might take a litt le longer in that particular case.
But nevertheless, we will take on the contract with profit. We're optimistic about where that's going to go because it's a big one.
Is that likely to be more a FY 2025 event for you in terms of getting started? Or could it kick in earlier?
I can't say at the moment. You know, we obviously can't say too much more about the whole thing until it's actually announced formally. I think the contract will be done in the second half. Probably don't put anything in FY 2024. That's probably the sensible way to go. It'll be FY 2025 and beyond.
Just coming back to you, did you touch on the efforts to get indexation? I noted that Pathology Australia has made a submission to Treasury for the budget. Is that the sort of process you're working through now?
And if you had any sort of early feedback about how the department will brief on this?
Yeah. I, you know, this is being run by the Industry Association. Obviously, we're members of it. But I don't think there's any recent feedback. I think there's the approaches from the Industry Association to government were warmly received. And I think our position is understood. And so, I guess that's about all we can say. I don't want to mislead anyone about what th e outcome is because we don't know.
No, I understand. Thank you very much. Appreciate it.
Thanks.
Thank you. One moment for questions. Our next question comes from Steve Wheen with Jarden. You may proceed.
Yeah. Thanks very much. Good morning, Colin, Chris, and Paul. Just a question on the Australian pathology business and your exposure to the GP referral channel.
I'm just wondering how, you know, what that looks like at the moment. Clearly, the specialist segment's working well for you. But just trying to understand with the shortages of GPs and the reduction in, I guess, face time visits, I'm just wondering what, what your performance has been like, out of that referral channel.
Yeah. So Steve, I think your point is well taken, that there is a reduction in consultations in general practice. But, you know, we're, we've always been very strong in both in the three submarkets, so GP, specialist, hospital. And the GP market is a very important one to us. But there's no doubt that it's not as strong as the specialist market at the moment. We're also very involved with referrals coming from online GPs as well, which has taken over a proportion of the face-to-face GP market.
But we're well advanced with taking on referrals in that subsegment. And it's a new one, because that is part of the reason why the consultation rates are lower, because a significant proportion of patients are accessing GPs online. So we're not at all concerned about our position in that market. And I think I can say that confidently because of our great strength in the specialist and hospital markets as well.
Right. Thanks, Colin. And just one for Chris, just on the tax rate, trying to understand why that's now going to sort of end up at the top end versus your original expect ations.
Yeah. Maybe Paul can answer that one.
Yeah. So if I cast you back to the second half of FY 2023, we had an unusually low tax rate at that time.
We explained that that was because of the potential tax deductions associated with employee options, and where our share price stood at 30 June last year. Our share price, unfortunately, at December this year, was lower than that. And as a result, some of the benefits that we saw in the second half of FY 2023 is effectively reversed in FY 2024. So, depending on what happens with the share price from here, that might move the rate around for the rest of the year. But based on, you know, current share or at least yesterday's share price, let's say, we expect it to come out around that 27%.
Great. That's understood. And then finally, you've already talked to this just on the collection system. You mentioned I did have some expectation that that might contribute in the second half.
But it sounds like that's more like an FY 2025 story now. I'm just wondering, with the pilots that you've done, what the sort of improvement in the doubtful debts experience has been, if you can give any sort of anecdotal landmarks from those pilots. That'll be helpful.
There is some impact in H2. Nothing's changed in terms of our timing, just to be clear. If you look at Colin's slide, you'll see that one of the reasons H2 earnings will be accentuated is because of the revenue system in the U.S. But what we're saying is and what we've said, you know, all along is that the major impact will be in 2025 and onwards as we roll it out to the bigger entities in our clinical lab business in the U.S.
Okay. Got it.
And then the performance, just how the pilots are tracking, what sort of experience you've seen in terms of the improvement on the doubtful debt provision?
So it's in line with our expectation, which I think, again, we touch on in the presentation. So, it's going well. It's around that 5%, potentially better. But it's, you know, we're still talking about the evidence we have so far is still with smaller entities in our group. Some of the larger entities that have more recently gone on it, it's too early yet to make that assessment. But, you know, we have every expectation that it will still be around that sort of level.
Thanks, Paul.
Thank you. One moment for questions. Our next question comes from Mathieu Chevrier with Citi, you may proceed.
Good morning. Thanks for taking my question.
Just had one on the fee cuts revisions. The cut in Belgium, it's a small market for you. But a bit of a surprise. I was just wondering if there are other markets where, you know, your fees may be under review because back in just in November, you had mentioned the expected fee indexation. But there was no mention of a potential fee cut. Thank you.
Yeah. So back then, it was not at all clear that there would be a fee cut. So obviously, if we knew about it, we would have said that it was a certainty. So in the rest of our markets, there's no indicator of any other fee cut coming. And so as you know, there was one in Switzerland, a year and a half ago.
Other than that, there's nothing on the horizon, nothing in Australia. In fact, we're asking for the opposite here. We're getting indexation in a number of markets, which is really good news. The strange thing in Belgium is the indexation plus a fee cut, where you get a net it was a net negative, obviously. It's 15% against 6% indexation. That's probably it.
There is still, obviously, the potential for the PAMA fee cuts that were deferred.
Oh, the U.S. one, yeah.
From this year. But in theory, will happen next January. But obviously, industry continues to lobby in that regard, and continues to push for the SALSA legislation, draft legislation, that would mean that cut wouldn't happen. But-
How many years has it been delayed?
I think it's four now, isn't it?
It's four years in a row that PAMA fee cut has been shelved, temporarily. So we're hoping that that continues.
Yep. Understood. And then, just on radiology, I'll say your margins expanded, quite healthily again. And you have those new greenfield sites opening in the second half. I was just wondering where should we think margin will be going from here sequentially and into next year?
You look at—you sometimes get a bit of a negative effect on margin, not on profit, but on margin from greenfields because it takes a little while for them to build up. So there's probably some effect of that that might flow through. But ultimately, you know, we're pretty selective about where we put our greenfields. So you'd have to think that reasonably quickly, we'll get into a healthy margin situation.
And there's some brownfields kind of things as well. We're adding in some PETs. And that's, that's quite, that's quite margin accretive, obviously, in existing centers.
Yeah. Got it. And, and just one final one on labor cost. You had mentioned that your labor cost control is almost unique. I was just wondering if you could elaborate on that, and, and whether you think your labor costs in the U.S. could be somewhere around the 3%-4% mark, like your competitors are forecasting for calendar year 2024.
So I think that's probably in more or less in line with where we are in the States. When I said unique, I was really referring to the job, that was ahead of us post-pandemic. And, you know, so we, we had, we had to climb a mountain to deliver that service.
That required a lot of additional people to provide that service, different in different markets. So for example, in Australia, we ran, you know, so many drive-through centers. And we did millions and millions of COVID tests right around the world, which requires people at not just that department testing level, but also at, you know, courier level, at front-end level, where you're accessioning the cases. So once the pandemic was over, the big job was to downsize the company or right-size the company. And of course, that was unique. It’s never really happened to this extent, obviously, because we’ve never had a pandemic with that kind of volume increase, ever before.
The interesting thing about this and I was hoping to get that across in the presentation is that as the pandemic dissipated, so we're experiencing probably stronger growth than we've experienced potentially ever before. And so with that growth, you know, you also have to handle that growth with equipment and manpower, personpower. So, we've sort of it's a balancing act of making sure that we are right-sizing the company to the most efficient level to deliver the margin accretion that we're talking about. And we're confident that we're going to do that because we have a very clearly laid out plan in the next six, 12, 18 months to achieve that.
Got it. Thank you.
Thanks.
Thank you. One moment for questions. Our next question comes from Sean Laaman with Morgan Stanley. You may proceed.
Thank you. Good morning, Colin, Chris, and Paul.
Hope you're all well. In the radiology division, you've seen some really good margin improvement there, which is a disparate performance for, to your peers. I'm wondering sort of what are some of the key elements of the points of difference that you, you might be observing.
So our, our managers would say brilliant management, which, which they are. But, you know, we do have an outstanding radiology division. And when I say that, I'm talking about the leaders, and all our radiologists and all our staff. You know, radiology often depends on the expertise and efficiency of radiologists and their enthusiasm for the job. It's a it's a little different in pathology. But radiology is very radiologist-centered. So, that's the first point, in this.
When you have that in place, an outstanding team of people in a division like this, and you have a professional or an industrial change that's occurring, and that's the shift towards the higher-end modalities, which are higher paying and higher profit-generating, then you will get margin accretion. And then thirdly, if you add to that astute greenfields and brownfields additions to the existing infrastructure, and all three of those are actually applying. So it is an opportunity to say a big congratulations to the leaders of our division and all the radiologists and staff because the performance is outstanding. And we certainly expect it to continue.
I think I'd, you know, I always add on, on top of this, is that Sonic medical leadership culture provides the right environment for this to occur, where doctors, our radiologists, trust the system, and are happy to work in the system and feel fulfilled. You know, this is very, very important to answer your question.
Sure. Thanks, Colin. And on the AI piece, so the adoption of Annalise.ai and the chest X-ray program, what might you be able to tell us whether it be quantitative or qualitative of the impact of that adoption on the radiology division? And what learnings might there be for when you get the Franklin.ai product out on the anatomical pathology side?
Yeah. So it's a difficult question.
I don't want to say too much about, you know, whether there's, I don't want to preempt Harrison and what they might say. But in terms of Sonic, I think it's important just to realize that the chest X-ray product has upside potential. But it's not material because the chest X-ray is a fairly quick examination. So the opportunity for increased or enhanced performance is fairly small. But when you go on to CT brain, which is a more complex examination, that requires more expertise and more time, the upside potential for efficiency is much greater. So, you know, we're certainly expecting benefits to come rather than them being already accrued, as the brain CT product is rolled out.
On the question of the Franklin product, that's a very different story because the Franklin product, the prostate product, is applicable to the diagnosis of prostate cancer, which is no easy task for an anatomical pathologist specialized in that field. The reports are required to be detailed and fairly lengthy. And often, there's a lot of material that needs to be examined. So, in terms of efficiency gains in that particular tool, I think there's quite a lot of upside to come just in Sonic labs. So, you know, we've kind of flagged that the Franklin products will be applied to Sonic operations, but also to be commercialized globally.
So if you offer this product to a lab anywhere in the world and can demonstrate, which we hope we can do via Sonic trials, that there is efficiency gains where pathologists are comfortable with the product and see that it's actually a great tool to assist them with a diagnosis, then I think there is a huge upside that will come to the Franklin joint venture. So we're around 50% of that. And of course, within Sonic, we do a lot of prostate cancer work right around the world. There will be upside for us in terms of pathologist efficiency as well.
Great. Thank you, Colin. That's all I have.
Thank you.
Thank you. One moment for questions. Our next question comes from Craig Wong-Pan with Royal Bank of Canada. You may proceed.
Good morning. My question, just wanted to ask about the cash flows.
I noticed that the accounts payable did drop quite significantly from the last period to now. Just wanted to understand what has driven that.
Give it to Paul .
Yeah. So look, we touched on that in the 4D, Craig, just really timing of credit appointments.
Okay. So should we expect that to kind of revert back, sort of after December?
I think so. Some of that buildup was, I think, really related in some ways, pandemic-related. So I don't think it will build up to that same degree again.
Then just one last question on how we should be thinking about CapEx for FY 2024, given you've got a number of brownfield and greenfield investments. Could you provide any thoughts around how we should think about the full-year CapEx number?
Yeah, Craig. It's Chris here.
Look, there are a few things at play that have probably affected the first half more than the second half. We've got, we're building a fairly significant extension to our Sullivan Nicolaides lab in Queensland, which is about a AUD 75 million spend. It's almost finished. There's a lab we've built in Munich, lab we've fitted out in Hamburg. And as you've identified, we've mentioned, we've got a bunch of greenfields. And those are all sort of circa 5+ million each. So I think the second half is probably going to be a bit lighter than the first half because of the runoff of those two bigger projects. That's probably all I can really say right now.
Okay. Thank you. That's helpful.
Thank you. And as a reminder, to ask a question, please press star one one on your telephone.
One moment for questions. Our next question comes from David Bailey with Macquarie. You may proceed.
Yeah. Thanks. Good morning. In your interest of time, I'll be fast. Just, in terms of the guidance, you've called out some currency exchange headwinds versus August. Just wondering if you could help quantify those as you're seeing at the moment. And sort of what are you assuming for the rest of the year? When you say assumes current exchange rates, is that as it now? Or is that assuming rates back in August 2023?
So it's assuming rates effectively as it now or the last few days. And in terms of the headwind versus August, it's kind of in the order of call it AUD 10 million, something like that, a bit below maybe.
Got it.
AUD 10 million at EBITDA line, that.
Yep. Yep. Thanks, Paul.
Thank you.
That concludes the conference call. Thank you for your participation. You may now disconnect.
Thank you very much, Josh, and everyone.