Good day, and thank you for standing by. Welcome to the Sonic Healthcare financial year ended 30th June, 2024 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press dial one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press dial one one again. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Chief Executive Officer and Managing Director, Dr. Colin Goldschmidt. Please go ahead.
Thank you very much, Amber, and good morning, and welcome to everyone on the call. If I may, I'd like to preface the presentation on our full year 2024 results with just a few brief opening comments, which will be about the financial year and our outlook for 2025 and beyond. In a nutshell, the 2024 financial year can be summarized as a transition period for Sonic Healthcare as we moved away from what I can only call a tumultuous, even disruptive, period following the pandemic and as we move towards business as usual. But putting the pandemic well behind us, the company remains in a very strong position, both financially and in terms of market positioning.
I was keen to highlight just three key features which will drive our earnings and margins into the future, and of course, we'll cover these in more detail in the presentation itself. Firstly, our organic revenue growth remains consistently strong, giving us the opportunity to leverage our infrastructure and expertise to drive marginal profitability. In many ways, strong organic revenue growth is the backbone of our success as a company, and we certainly do expect that to continue into the future. We do get asked about why Sonic's organic revenue growth is strong. And in my opinion, it relates directly to our long-standing culture of medical leadership. And medical leadership means leaders who have a deep understanding of our business and who understand doctors. Our CEOs and executives around the world, many of whom are doctors, are all medical leaders, even if they are not doctors.
And it's this leadership model that sets in train a successful business formula. Medical leadership resonates with healthcare workers and serves to attract and retain the best pathologists, radiologists, and GPs, that's our doctor group, as well as technical and other healthcare staff, too. And then this serves naturally to drive higher quality and super specialized services. And so these, in turn, will work to attract and retain customers, which then feed directly to strong organic revenue growth. And if it, if it's okay, I'd like to take this opportunity here to acknowledge and thank Sonic's leaders and doctors around the world, because I know a bunch of them would be tuned in, for their incredible contributions to our company and our business outcomes as well. The second feature that I want to raise is about M&A.
And on the M&A front, we're very much back in business with a series of high quality, culturally aligned and synergistic labs, which have chosen to sell to us in the FY 2024 year. I point to Germany, Switzerland, and the USA over here. To join us in long-term contractual partnerships, and I refer here mainly to the U.K.'s National Health Service. These acquisitions and contract wins are also very much based on medical leadership, where labs actually prioritize cultural fit and reputation in making their decision to join with Sonic. The acquisitions completed in FY 2024 are material to Sonic and will not only augment our top line growth, but will also serve to augment our earnings, our margins, and our return on investment in the years ahead.
And thirdly, I'm very pleased to say that we're now largely complete with our post-pandemic headcount reduction program to rightsize the company for our progression into the future. So with that, can I please take you to Slide 3 of the presentation? And on this slide, first of all. By the way, I did omit to say that I'm joined today by my colleagues, Chris Wilks, CFO of Sonic Healthcare, Paul Alexander, Deputy CFO of Sonic Healthcare, and Diane Ayres, Senior Executive and Investor Relations, Sonic Healthcare. So on Slide 3, we present a table, and just first of all, looking at our revenue, total revenue for the year came in just short of AUD 9 billion. But if we take out the COVID revenue, it's AUD 8.905 billion.
You'll get a look over there at the significant transition out of the pandemic from almost AUD 500 million of revenue in FY 2023 related to COVID, down to AUD 62 million in FY 2024. And I could use that just to say that the comparatives between the two years, hopefully for the last time, are not quite appropriate, given this big swing in COVID revenue. When we look at our EBITDA number, it is in line with our guidance provided in our market update in May, just recently, at AUD 1.602 billion. Our revenue also does obviously include the beginning of, or some of, the acquisitions made through the financial year.
We call out AUD 655 million of new annual revenue from these acquisitions, plus there is additional revenue coming through from contract wins as well. Our conversion of EBITDA to cash was healthy at 95%, and the board of Sonic has ratified a dividend, a final dividend of AUD 0.63 per share, which is up 2%, giving us AUD 1.06 per share for the full year, which is also a 2% increase over the full dividend last year. Moving on to Slide 4 and our guidance. We're giving guidance at EBITDA level of AUD 1.7 billion-AUD 1.75 billion on a constant currency basis, and this too is unchanged from the guidance we flagged at the trading update in May.
This guidance reflects up to 10% EBITDA growth on FY 2024, and just an early indication of 2025, our July trading is in line with our budgets, and obviously, our budgets are used to determine our guidance. Depreciation expense, as a percentage of revenue will be expected at the same level as 2024, and our interest expense is likely to increase by about 25%, reflecting the acquisitions that we've made in FY 2024. The effective tax rate will be somewhere between 26% and 27%. Further guidance considerations, we exclude new acquisitions that might happen. Our guidance does include an AUD 15 million impact from potential PAMA fee cuts in the USA, even though we don't expect those to go through.
There are no other regulatory changes assumed, and our guidance also does incorporate an initial AUD 10 million loss from the Hertfordshire and West Essex contract in the U.K., which will become profitable in FY 2026. And just for noting, the FY 2024 EBITDA, it did include AUD 14 million of acquisition expenses, and we assume in our guidance that interest rates remain constant. On Slide 5, we provide a table for your information showing the acquisitions completed in the FY 2024 year, totaling AUD 655 million annual new revenue from acquisitions.
If we look at Germany, we've got the two medium to large-sized labs, that's Medical Laboratory Düsseldorf and the Diagnostikum Group, summing up to around AUD 200 million, and then four smaller acquisitions, two anatomical pathology and two clinical pathology, also in Germany, making up the balance in Germany. Then moving to Switzerland, two large acquisitions, MediSyn, which was the former Synlab laboratory operations in Switzerland at AUD 175 million, and our most recently announced acquisition, the Dr. Risch Group, also at around AUD 175 million, totaling AUD 350 million of new annual revenue, plus a small anatomical pathology practice in Zurich, that's Pathologie Enge, and then when you add PathologyWatch, which was settled in January of this year, AUD 25 million of existing revenue, we get to the AUD 655 million.
We add to that, two contract wins in the U.K., the Whittington Health Trust, roughly AUD 20 million in revenue, and the larger Hertfordshire and West Essex Trust contract, a 15-year contract, which will only commence in Q4 FY 2025. Now, moving to Slide 6. On Slide 6, we've provided a profile here of our key earnings drivers, and we've set them out, in a time-based format to indicate roughly when each driver will have maximum impact. So starting with, the drivers that are ongoing, I've mentioned, and called out strongly our strong base business organic revenue growth, coupled with tight cost control and consequent margin expansion. That's really the bedrock of our ongoing business. We also then are benefiting from annualized or annual fee indexations in various markets and contracts.
including radiology in the UK with our contracts in Belgium, Sonic Clinical Services, and Australian Pathology, which will only begin in FY 2026, but will then be ongoing to a portion of the pathology fee schedule. And then ongoing is also the optimization that we are in of our fees that we're involved with in many or all our markets. And these are situations where we are able to set or negotiate pricing. It does represent a significant portion of our revenue, and we continue to optimize this initiative. It's an important one for us. Moving on to those drivers that are specific for FY 2025. First of all, the impact of our post-pandemic headcount reduction is very important, and we've done that to rightsize the company, and it's almost complete.
Then the sale of the West Division in the USA, which will eliminate approximately AUD 15 million of operating loss over a nine-month period in FY 2024, and then the early synergies, which will be coming through from our acquisitions in Switzerland and Germany and the USA. Now, most of those acquisition benefits will be flowing through in FY 2026, especially the Swiss acquisitions, Medica and Dr. Risch Group, and we'll be discussing those a bit further in subsequent slides. These are two businesses which were acquired at almost zero margin, and we have a very confident plan in place to take them substantially higher in the next one, two, or three years. The synergy benefits that will flow from the German acquisitions will be somewhat in FY 2025, but maximal in FY 2026.
I've mentioned the benefit coming from the Hertfordshire and West Essex contract, a loss in FY 2025, becoming profitable in FY 2026. Our enhanced revenue collection system in the USA, that's XIFIN, we will get approximately $10 million uplift in 2025. It's maximal in 2026, where we get $20 million-$25 million approximately, and still some further benefit flowing through in FY 2027. Just for noting, we haven't yet rolled out the system into our two largest labs in the U.S., and that's why this is projected to hit maximum benefit in FY 2026. The inflationary pressures on labor costs is an important point, because they have occurred in FY 2024, but are now easing, but still annualize somewhat into FY 2025.
Therefore, with interest rates staying low, which we hope they will, we will get maximum benefit from this in the FY 2026 year. And just of interest, our headline inflation rates in our markets are in the range now of 1.3%-3.8%. So the, the pressure coming on, not just labor, but other, costs from inflation, are dissipating quite rapidly. And then PathologyWatch in the USA, we expect maximum benefit to come out of that in the FY 2026 year. On Slide 7, we outlined the dividend information, which I've already mentioned. The final dividend will be unfranked. Record date, 5 September 2024, payment date, 19th September 2024.
And we want to make the statement that we are confident to maintain our progressive dividend strategy, despite the unusually high payout ratio of this dividend this year. And we can discuss that further during question time, if there are any. On Slide 8, again, for information, is our capital management numbers. I guess the most important thing to see here or two things. One, our net interest has increased quite substantially, but that's in line and reflects the acquisitions made through the year. But importantly, to see that our debt cover and gearing are both returning to pre-pandemic averages, and it is our intention to keep them at investment-grade level. Our available headroom at 30 June 2024 is approximately AUD 1.5 billion, but that's before payment of the final dividend.
The pie chart on Slide 9, that we normally show, despite the fact that the pie. Not despite, the pie has increased substantially since last year. But, of interest, and just to note, changes from last year, Switzerland has increased its relative size. Its segment was 7% a year ago. It's now 10%, and that reflects the acquisitions made in Switzerland. Germany has also increased slightly, again, reflecting acquisitions. And it's interesting, if we look ahead, we can anticipate that segments, U.S., Germany, Switzerland, U.K., will expand further than the Australian segments, only because of market sizes and acquisition opportunity in the non-Australian markets, that are available to us. And then we'll move rapidly through our divisional slides.
First of all, the USA on Slide 10, our base business organic growth there was 3%, which we believe is in line with, and possibly even exceeding market organic growth. And from an operations point of view, we have formed a new dermatopathology division in line with, and in order to integrate our PathologyWatch acquisition and its digital pathology platform into our dermatopathology division in the USA, which is substantial. We are aggressively rolling out digital dermatopathology, that's skin pathology, which will drive growth and cost efficiencies in time. We're also we have completed a divisional restructure for the whole U.S. operation, which integrates our anatomical pathology with clinical pathology, which we believe will be a much more efficient way to go forward, and will also facilitate cross-selling between those two sub-disciplines of the laboratory profession.
There'll be a further approximately 120 headcount reductions that will occur and will be completed by the end of Q1 of this financial year. I've mentioned that we're continuing to roll out our enhanced revenue collection system, and I've also mentioned the PAMA Medicare fee cuts, which we expect and hope will be deferred once again. And I've also mentioned previously the sale of our loss-making West Division. Australian pathology on Slide 11. Very pleasing base business, organic growth of 10%, which we believe includes market share gains. We are strong in the specialist and hospital market, and we are strong in the GP market as well. They are more or less equal, but we have particular strength and expertise in that specialist market, where we dominate in the higher complexity testing in pathology.
From an operations point of view, there's been a lot of work from all our divisions in right-sizing the company in terms of headcount. And we've mentioned here approximately 400 full-time equivalents have been reduced since the COVID peak in January 2022, with 150 FTEs reduced in FY 2024. We also continued to rationalize our collection center infrastructure, and we've closed a net 50 in the past 12 months. I've mentioned before that indexation or partial indexation of the Medicare fee schedule for pathology will commence on 1 July 2025. We're hoping that this is only the beginning, and that indexation will, in the near future, apply to the full schedule. And I also mentioned that we continue to target private billing wherever possible. Moving on to Germany.
Again, strong base business, organic growth at 7%, and also, like the Australian pathology sector, we are strong at the high end of this, of the profession with specialists and hospitals being right in our expertise. We've mentioned some of the tests, but these are just a few with genetics and Oncotype DX, molecular pathology, anatomical pathology. These are the high-end tests that we're strong in, in most of our markets. We've mentioned the two medium to large acquisitions, that's Düsseldorf and Diagnostikum, which is in the Dresden area, and those four smaller acquisitions. We've also commissioned recently two new labs, one in Munich and one in Hamburg.
These are going to be not only keeping us at the cutting edge of our game, but will also facilitate multiple mergers, which will drive further efficiencies in the division. Our newly formed anatomical pathology division is performing strongly and there's synergy to come, and there is a proposal to reform the statutory insurance fee schedule, otherwise known as the EBM, from January 2025, but we expect this to be net neutral to Sonic, if in fact it occurs. We've got two Slides here on Switzerland. First of all, just the ongoing business. Base business, organic growth is sitting at 5%. A few bullet points on the recently announced Dr. Risch Group, which was completed March 2024. This has revenue of CHF 94 million in Switzerland and approximately CHF 8 million in neighboring Liechtenstein.
Purchase price was CHF 175 million , and about a quarter of that purchase price has been taken of the consideration in Sonic shares. 650 lab staff, 13 laboratories in Switzerland, and one in Liechtenstein. And we're delighted that the founding family pathologists The Risch brothers, both pathologists, will now form integral positions in our new senior management teams in Switzerland. I've also previously mentioned Pathologie Enge, the small anatomical pathology lab in Zurich, which will integrate nicely with our anatomical pathology in Medica, which is the largest lab in Zurich. And we've mentioned MediSyn, which is the previous Synlab Swiss operations, roughly CHF 100 million in annual revenue.
The second Slide on Switzerland is an important one, and we show you the map to give you a sense of the very substantial operations that we now control in Switzerland. It's made up of now four large lab operations. One, MediSupport, two, Medica, three, MediSyn, that's the former Synlab operations, and then the Dr. Risch Group. And we're now well advanced in pulling this all together to form one unified national group. It will be called Sonic Swiss, the parent company, but we will not brand that name necessarily. And this initiative is going to be led or is being led by CEO Blaise Montandon, and he has pulled together a power-packed management team with representatives from all four of these divisions.
You can see that this covers the entire length and breadth of Switzerland, all three language regions, and five smaller regions within Switzerland. We will be retaining brand names, which is very important in all our markets, and especially in Switzerland, but that's what we do. Everyone will be unified under the Sonic logo and the Sonic colors. There are major synergies ahead here, and this work has already commenced, so multiple laboratory mergers, procurement, IT integrations, logistics, corporate services, and others. These will progressively flow through from a zero margin start in two of these businesses, that's Risch and MediSyn, to hopefully something pretty substantial in terms of EBITDA margin. As said before, probably maximal impact or weighted at least to FY 2026 and beyond.
We're very excited about what's going on in Switzerland and real kudos to our team over there. Slide 15, U.K. Strong base business, organic growth at 9%, and that strength is shown in both our private business, TDL, and our NHS business, HSL. Our contracts with the NHS are indexed, and we have pricing power in our private work in the U.K. We've mentioned the two NHS contracts, and we are currently bidding for further NHS contracts at the moment. Belgium-based business, organic growth here was flat, impacted by a fee cut of 15%, which kicked in on January 1, 2024, but which was offset by fee indexation of 6% starting at the same time.
So this was a net negative of 9%, but we are mitigating that through price increases for tests not on the fee schedule, and also an increased focus on automation and efficiency gains. It's interesting in Belgium. Belgium is moving towards doing primary HPV testing for cervical cancer, as has already been adopted in Australia and elsewhere. And our lab in Antwerp, AML, is very well positioned as a natural and national reference center for cervical cancer. So we're sitting in a very prominent position in terms of this change taking place in Belgium. We're also trying to expand our test menu as much as possible in our market in Belgium. The radiology division, Slide 17, very strong top-line growth, 11%, of which 10% is organic.
EBITDA growth was 14%, with margin expansion of 70 basis points. There's an ongoing trend towards higher modalities in radiology in general. Fees are now indexed annually at 3.5% was the indexation from 1 July 2024. We've established six new greenfield sites in the 2024 financial year, and there's a further seven planned for this financial year, and we have commissioned six additional MRI scanners and four additional PET/CT scanners in FY 2024, and we are increasingly using AI tools in our routine radiology reporting. Slide 18, Sonic Clinical Services. Revenue growth was 13%, organic growth was 5%, EBITDA growth, 9%.
Our growth in the GP division reflects the increased government funding, that's the tripling of the bulk bill incentive for those in Australia on the line, but also, our increase in private billing as well. GP service fees are now indexed, and again, it was 3.5% from 1 July 2024, and we're in the process of ramping up our capacity to begin our fairly substantial Australian Defense Force pre-recruitment contract. On Slide 19, we just revise and outline our activities in the digital pathology space. This is an important area for Sonic Healthcare. We are one of the largest anatomical pathology companies in the world when you put all our AP together. So anatomical pathology, as we've said before, is undergoing a revolution from its analog methodology to digitization and the use of AI tools.
And we, at Sonic, are mindful to stay at the cutting edge, of this revolution, given our size and our expertise in this subdiscipline of pathology. So our acquisition of PathologyWatch was a step in that direction, completed in January 2024. PathologyWatch, just as a reminder, has this brilliant AI-enabled, digital platform for skin pathology, and we are currently rolling this out in the USA first, and that will be followed by rollouts in the, other countries, probably Australia second, and then our European operations as well. And then our investments in Harrison.ai and its subsidiaries. So firstly, Franklin.ai. Franklin.ai is a joint venture for pathology AI. Sonic owns 49% directly and another 9% indirectly.
Incredible news is that Franklin.ai's first anatomical pathology AI product, which is called Prostate Digital, is now complete with excellent results. This is an amazing product that picks up round about 40-45 findings on prostate biopsies or what we call chips, which come from the transurethral resection of prostatic tissue. It's going to be deployed for clinical evaluation in Sydney, Sonic's DHM lab, first up, and that will commence in the second quarter of FY 2025, and then other labs will follow. Prostate Digital is gonna be formally launched at the European Congress of Pathology in just a few weeks' time, and we are in the process of applying for regulatory approvals in Australia and in the EU. Then moving on to the radiology product, Annalise.ai.
This is a radiology decision support solution. Sonic's ownership is 18% via the parent company, Harrison.ai, and Annalise has already launched two products, a chest X-ray product and a CT brain product, and has had great wins across Australia, Asia, Europe, and the UK. Both those products are now in use by Sonic and I-MED, the two largest radiology providers in Australia, on a routine basis. Annalise has won 80% of the recent NHS England tenders for chest X-ray AI, and will soon be analyzing about a third of England's chest X-rays, which again, is an amazing achievement. And there's a further CT brain finding, which has received separate reimbursement by U.S. Medicare, which will begin later this year.
The next Slide is just to let you know that we are making great progress with our ESG program, and all of the details of this will be published in our sustainability report in November of this year. And the final Slide, Slide 21, is just an outlook summary to say that we are enjoying leading market positions in the countries which we operate, in the markets which we operate, and particularly in the specialist and hospital market segments. I've emphasized our strong organic base business revenue growth, which we believe will be ongoing, and it's underpinned by medical leadership and brand differentiation, and our excellent reputation and high-quality services. We're back to margin expansion, which is supported by our ongoing revenue growth and cost control and operating leverage.
We've tried to call out in this presentation the specific drivers which will further enhance our earnings and margins, such as synergies from M&A, new contracts, lower inflation, technology investments, and others. We have further acquisition and contract opportunities under consideration at the present time... Thank you very much, and I'll hand you back to Amber to conduct the question and answer session. Thank you very much.
Thank you. We will now begin the question and answer session. 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. Our first question comes from the line of David Stanton from Jefferies. Please go ahead, sir.
Morning, team, and thanks very much for taking my questions. Can you hear me okay first? There's a bit of background noise every second.
Yes, very good.
Thank you. So one for Chris, if I may. Could we get some color on what we should expect for amortization for FY 2025, FY 2024? Is it? Should we be thinking about the same kind of increases we're gonna see for depreciation, please?
Yeah, look, I think you're talking about amortization of intangibles here, Dave, I guess.
Yep.
Yeah. Look, yeah, the growth should be probably similar to what you've seen in 2024. It's a result of kind of fairly significant investment in IT tools around the Sonic world. So, we haven't given specific guidance on that, but yeah, if you made that assumption.
Sure.
You'd be pretty close.
A significant part of that increase, Dave, is to do with the PathologyWatch.
Yeah.
System, where we apportion part of the purchase price to the identifiable intangible, therefore amortizing it.
Yeah, so in 2024, we only had half a year of that because we only settled in January. So I think from recollection, it's something like AUD 3 million extra a year or something like that.
Brilliant. Thank you, very clear. And then, back to Colin. I've been very interested to understand in Australia, how are you gonna go about private billing? Could you give us some more color and potential sort of, subtypes of pathology where you think there's an opportunity to increase private billing rates? Thank you very much.
Yes. So there are a number of areas where this is happening and hopefully or possibly increasing. So first of all, we are free to private bill any test that's covered by the Medicare schedule. That obviously has patient gaps associated with it, but that's been around for a long time and has the potential to actually increase, particularly where there are tests of higher complexity. There are also tests on the schedule which have description restrictors. And, you know, a good example of this is, say, a PSA, which I think everyone understands what a PSA, the prostate-specific antigen test. There's a, if you're not doing it for any other purpose than a screen, you can only do that once every two years.
If people wanna have a prostate, a PSA test every year, that's an example of a test that could be privately billed and is being privately billed, where patients are quite happy to pay for that test, even though it's not reimbursed by Medicare. But then there's a whole bunch of tests that are actually not on the fee schedule, and these are less common tests, yet important tests, which we offer. So many of the genetic tests, for example, are not on the fee schedule, and we bill those privately, and we can set the fees over there. The other big area in Australia is our hospital work, which we have plenty of, where we have the opportunity to negotiate with the health insurance companies from time to time.
Excellent. Thank you. And my last question, you mentioned that there may be change to the EBM in Germany, and you said that's net neutral. I wonder if you'd give us more color on that in terms of, you know, changes that are sort of proposed in terms of, reimbursement, if that's okay. Thank you.
Paul's gonna.
David, Paul here. Yeah. So the proposed changes include some cuts to fees for specific tests, but then there are offsetting increases to a number of different items, things like transport fees and electronic ordering fees. And because Sonic and also pathologist-related fees. So because Sonic employs a lot of pathologists in Germany, and because we lead the market in electronic ordering with our Star.net system, when we model all of that out, it comes out roughly neutral to maybe slightly positive. Now, there is still lobbying going on against this reform, because it's not gonna have the same result for all players, and so it's not certain that this will occur, but our best estimate is that it's neutral from our point of view.
Brilliant. Thanks very much.
Thank you. Our next question comes from the line of David Low from JPMorgan. Please proceed with your question.
Thanks very much. Could we start with the U.S. and the reason that the Western region was sold? And maybe if I could get you to expand a little bit onto the underlying organic growth, which frankly looks fairly soft versus the rest of the world, and we don't seem to have seen much of an uplift post-pandemic. And then I'll throw into that the anatomical pathology, if you could give us an update on that specifically as well, please. Just on the U.S., we, you know, the Californian market or the west, our western division is quite different from some or from the other divisions. There's different dynamics in how pathology is paid for. There's a lot of capitated work over there.
And, you know, we've tried various initiatives to turn this business around. And, in the end, the decision was made that this would be the best thing for Sonic. And so the sale of that division doesn't impact any of our other divisions, and kind of makes sense, it was a logical thing to do. We don't have the same issues that apply in California elsewhere. So that's that one. You wanted to know about the base business revenue growth. It's very difficult for us to actually determine exactly what the market growth rates are. We look at information that comes from published XIFIN information, and we're certainly substantially above that. And then we look at the results of some of our competitors.
But the problem with comparing to our largest competitors, our two main competitors, is that we believe that they might add contract wins from hospital deals into organic growth or into revenue growth that's non-acquisitional. So, our best estimate is that our 3% growth is at or better than the market. Then your third question was about anatomical pathology, but you didn't specify what you wanted to know about it.
Okay, let me cut in then. The 3% is at or better. Why is the U.S. market only growing at 3%? It seems pretty disappointing relative to what we're seeing elsewhere. And then on anatomic, we're aware of the large acquisition from quite a few years ago now. Just like to get a sense as to how that part of the business has been performing, sort of relative to the clinical labs, please.
Yeah. So, why the U.S. market is not growing at the same rates elsewhere? I don't have an answer to that question. And, in terms of our anatomical pathology division, you know, we are working very hard to grow that business, and we believe that the PathologyWatch acquisition in particular is gonna give us impetus to take it quite a bit further. We don't separate out. We haven't given the market any specific sub-divisional market or growth information, so I don't wanna actually go beyond what I can say. I don't know if you guys want to add anything.
I think we can probably say that the derm part of the AP business in the U.S. is about half of it. And so I think we're expecting, and we've seen signs of this in the last few months, that the benefits that come from using PathologyWatch, the digital side of it, the attractiveness that has to dermatologists, et cetera, is we're seeing some good growth in that in recent months. I don't know whether, I mean, we've got to wait to see how that goes in the medium term, but we'd like to think that we'll get some benefit out of that.
I think Colin alluded to in the slide that we're folding the AP businesses into the CP businesses by division, so that, there'll be a bit more direct oversight of those businesses than we've had, in recent years. So we're expecting that to help underpin further growth in those businesses and cross-sell between the clients we have in CP and the clients we have in AP.
So, David, you know, summary of this is that we've got, we're very optimistic about where it's gonna go. There's a lot in plan for that AP division. You know, and there's a lot to talk about in it. For example, we do a lot of thyroid fine needle aspirations, which is part of anatomical pathology, more than perhaps any lab in the whole world. And out of that came this test, ThyroSeq, which is a blockbuster for us. Now, if you include ThyroSeq in the AP division, it's a molecular test, and many people do, then the division's doing extraordinarily well. But as Chris has pointed out, we're doing a bunch of things to try and maximize our footprint to the benefit of the AP division.
That means bringing AP and CP together so that we can cross-sell, and that, and restructuring the whole of the USA, so that there's more intense management on these multiple smaller AP practices that we bought into the Aurora business that you're referring to. So we should probably move on, given that.
Yeah. Thank you very much.
I'll move on to the next.
Thank you. Our next question comes from the line of Liane Harrison from Bank of America. Please ask your question.
Hi, thank you for taking my questions. I might just follow on there from David's question on anatomical pathology. Can you give us a sense or quantify what the size of that cross-sell opportunity might be in the United States? And also, you know, what you think the size of the opportunity might be in Germany with your new division there?
Yep, so and this is gonna have to be, a non-specific, possibly even vague answer. Here in Australia, just to put it very clearly, AP and CP have grown up together in a single lab. And so if you won some AP business because you had super specialist expertise in, let's say, gynecological pathology, you would get the bloods from that gynecologist, or, you know, that would be the logical thing. Now, in the U.S. and in Europe, AP and CP have grown up quite separately. The training is different. The labs have been separated out, so that you have standalone AP labs and standalone CP labs, which are clinical pathology labs. And so, historically, the cross sell has not been a factor, in these markets.
Sonic's coming along and saying: Well, hey, hang on, there's obvious synergies and benefits to the referrer, to the customer clinician, in having all your tests done in the one place. So we can only be hopeful at this stage, but we don't wanna hype it up too much. We don't have any numbers in our guidance that specifically relate to cross-sell benefits, but we think there could be a significant upside into the future. We think this is the right strategy at this stage.
Okay. Thank you, and on that comment on guidance, if we could come back to that. You know, you mentioned earlier in your prepared remarks some guidance assumptions. I just wanted to understand, is the benefits of that revenue collection program, I think it was something in the vicinity of AUD 10 million for 2025, is that in that EBITDA guidance number?
Yes, it is.
Yes, it is. Yeah.
Okay. And then also that PAMA fee reductions, and the potential for it being deferred, when will that decision be made?
Probably before the end of the calendar year. We'll have to know before the end of the calendar year, so. And it comes late.
Yeah, it's only December, I think.
Right.
For a January start, so.
Okay.
It's not much notice, but that's when we historically have heard.
Okay, and that AUD 15 million, if it is deferred, that would all fall into EBITDA in terms of a benefit there?
Yes.
Yes, it would. Yeah.
Okay. And then the last one is these headcount reductions that you're talking about. You know, you flagged 120 people, I think it was the United States and the like. Are there any costs associated with those headcount reductions for 25, or is it natural attrition?
Yeah, look, it's relatively. No, it's. They're decisions that have been made, so it's not natural attrition, and.
Mm-hmm.
The main part of that cost, because when the announcement was, we've accounted for in 2024.
Okay.
It was only a few million dollars.
So you've already provided for that? Okay.
Yeah. Yeah.
Okay, fantastic. Thank you very much. I'll leave it there.
Thank you.
Thanks.Thank You.
Our next question comes from the line of Gretel Janu from E&P. Please ask your question.
Thank you. Good morning. I just wanna start on the margins. So I know you don't disclose margins by region, but I was wondering if you can give us some indication as to which regions are dragging on the recovery of margin, seeing greater cost inflations, and then which regions are exceeding. Any color there would be helpful. Thank you.
As you say, Gretel, we don't give margins per business, so it's a little hard to really answer your question there. You know, we've noted this headcount reduction in U.S., so you might draw some inference out of that, potentially. But in general, you know, we've seen good margin growth in the second half of FY 2024, you know, more than the usual level, and so we think that sets us up pretty well heading into FY 2025 across our group.
I think it'd be fair to say that in our budgeting, the improvements we'll be seeing, but we're expecting to see in margins is pretty much aross the board. So it's not like there's one major outperformer.
Yeah.
That's one, and another that's a lagger. It's. There's every one of our businesses are doing things to grow their business and improve their margins.
Great, thanks. And then just in terms of the headcount reduction, so when we look forward from here, just wanna be clear: You said that you're largely complete on that, so are we thinking about that margin improvement just going to be driven from revenue growth and mix and not further cost reductions?
Because the reductions occurred through the FY 2024 year and the U.S., the ones that we're now talking about in the first quarter of 2025, clearly there'll be a bigger impact of all of those changes in 2025 than there were in 2024. So there certainly is margin improvement to come from what we've already done.
Yes, but no further.
Yes.
Cost reductions that you're pulling out?
There's always cost things.
Always.
We're doing, Gretel, but not necessarily in labor. In some ways, if you're growing at, you know, you saw from the year, of last year, it's organic growth of 6%. If we can continue something like that and keep our labor largely flat, then we should start to see some leverage in the business and the improvements in margins flowing through.
Great, thanks. And just to confirm then, just in terms of cost inflation on your labor at this point?
I think we've sort of tried to call that out, that we did have inflationary or CPI-related pressure on labor in the FY 2024 year, which is kind of overlapping into FY 2025 to some extent. But following the annualization of that, we see the pressure falling dramatically given inflation rates are now. We gave you one you know between 1%-3%, something like that, in all our markets.
And particularly in our northern hemisphere, in Europe, the I think the 1.3 relates to Switzerland, but markets like Germany, I think about 2.2. So I guess when we get to the next annualized review of salaries, we're hoping that those lower inflation numbers will reflect in pay increases rather than. And we're beyond the large inflation peak, yeah. Yeah. And clearly, we've seen that here in Australia with the National Wage Case. You know, the previous year it was five and a quarter, I think, percent, and this year it was 3.75, I think, off the top of my head. So you know, certainly from an Australian point of view as well, that's helpful. And Australia is our highest inflation market right now.
All right. That's very clear. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Andrew Goodsall from MST Marquee. Please go ahead.
Nobody there.
Andrew, your line is open. Please.
Sorry. There we go.
Ask your question.
There we go. Sorry. Helps if I remove the mute. Just looking at the Australian business, if I've got it right, you closed about 2.8% of collection centers, but you grew 10%, which, unlike one of your peers, is pretty damn good growth in that sort of situation. You know, I'm just gonna try and get a bit of color around the strategy there, because, yeah, it seems. And then finally, sorry, just, is it a case of yours, it's yours to lose, if you've got that share back, or you've taken that share?
Yeah. No, I don't think we're gonna lose it. So, I mean, that would be part of our strategy, Andrew, is that, you know, I've always contended that there are far too many collection centers in Australia. We have more collection centers per capita than, by a long way, than anywhere in the world. So,
Mm-hmm.
And they're expensive. So because we are strong in the specialist market and hospital market, the hospitals don't rely on collection centers. Specialists don't rely on GP-based co-located collection centers either. And so, our strong growth in the specialist market, which includes hospitals, is kind of independent of those collection centers. And then in the collection area, you know, we're keen to have a combination of collection centers in the bigger, busier medical centers, but also to have standalone collection centers, which are free for all comers to attend. And that's the strategy that we're pushing. And so 50 net closures with strong growth I think is a very good outcome for the Australian division, and we certainly hope to continue on that path.
Great. Thank you.
Andrew, are you there?
Oh, yep. Yeah, so and just on the guidance, the one I've just focused in on a bit is the, just the interest costs going up 25%. So I presume that's a mix of acquisitions, perhaps a higher dividend, just, maybe just any commentary you've got around rates or any other factors I'm missing?
Yeah. So Andrew, by far the biggest driver is the M&A that occurred in FY 2024.
Mm-hmm.
We've raised some debt in the U.S. private placement market that we've announced a few weeks ago, which will replace debt that's maturing in November this year. And the debt that's rolling off was done at a coupon of, like, 2%, whereas we're now paying 4.1% under that new deal, so there's some higher rates there. Also, our bank debt facilities, the margin tends to be tied to a margin grid based on net debt to EBITDA. And as you can see from the chart on our capital management slide, that ratio has risen, and so the margins on our bank debt will be up a little bit as well. So it's a combination of those factors, but it's mainly the M&A.
And just go forward, so that's sort of 4.1, I think you said, rate is sort of probably your go-forward number until you have further-
That's for that specific deal, Andrew, for euro long-term euro funding. That's not the cost of debt across our group. That's an average 10-year fixed rate for that particular deal.
Oh, got it. Okay. And what sort of average rate should we be thinking about then?
Good question.
You've got them stumped.
We look at it by current. Current, yeah. Across the group. Average rate. it's probably not too far from that 4% mark, actually. A little less with some of the historic things still rolling off, but we can get back to you on that one, maybe, Andrew.
No problem. I appreciate it. Thank you.
Thank you.
Thank you. Our next question comes from the line of Craig Wong-Pan from RBC. Please go ahead.
Thanks. I just wanted to understand the U.S. West Division. How long has that been loss-making, and has it always been around that sort of $20 million loss level?
Yeah, it's a good question, Craig. It's an interesting one because it, it was struggling a bit running into COVID, and as you might imagine, during COVID, it was very profitable. So we had a business that was, like most of our business, was contributing good profits. But it was when the, I guess, those COVID revenues drifted away, that we started focusing more on it. And I think Colin's touched on it. It was in a, in a U.S. context, California's got some quirky aspects to it that make it a little more difficult to do business and make decent margins in our game. And you have to be a certain scale, and this business was kind of sub-$40 million revenue.
Unless we could find some decent acquisitions to add on to it, it was always going to be difficult to get it to profitability. So selling it for a chunky amount, it was a bit galling, but to a competitor, getting rid of the loss, getting the cash in the bank, economically made good sense, and we can focus on the other divisions that have got good growth opportunities in that market.
Okay, fair enough. And then for CapEx for this year, could you provide any expectations for how we should think about CapEx?
Yeah, CapEx for the year just gone was reasonably chunky, and it's had some, it was something like AUD 470 million. It had about AUD 130 million worth of building CapEx in it. And next year, likewise, we've got the acquisition, so that makes things a little bigger anyway, just because we're a larger business. But we also have a building acquisition. I think I can probably disclose the fact that we're planning on buying the Costco site in Docklands, in Melbourne, to renovate that and turn that into the Victorian hub for Sonic, and the new home of Melbourne Pathology. So that that's an amount that for the site will be close to AUD 100 million.
But also we're, as a management team and as a board, looking from a capital management perspective at whether or not we might consider some sale and lease back on our property portfolio, which is, you know, with that building in, it's kind of close to AUD 1 billion worth of property, which, you know, normal yields, call it 5%, is not what we would normally expect from our business. So that's something that we might be thinking of down the track.
Okay.
Does that answer your question?
Last question. Just on, like, the Slide 21, when it talks about further acquisition opportunities, and I know you always look at opportunities, but given that you've undertaken, you know, a fairly large number of acquisitions, your kind of debt coverage ratio is approaching that pre-pandemic level. Just wanted to try and understand how hard are you pursuing other acquisitions, or are you kind of more focused now on integrating those businesses you've just done?
So yes, is the answer to the last point. We're very much focusing on the businesses that we have acquired, and we are being highly selective in terms of what we look at right now. So obviously, if there's opportunities that come along that are highly synergistic, that make a lot of sense from a value creation point of view, then we believe we should still look at those, despite the fact that we've been very active on the M&A front recently.
Okay, thank you.
Thanks.
Thank you. Our next question comes from the line of Saul Hadassin from Barrenjoey. Please ask your question.
Yeah, thanks. Good morning, Colin, Chris, Paul. Maybe the first question, just on guidance and the EBITDA with growth mentioned at the top end of 10%. I'm just wondering if you're willing to give us a sense of how much of that you think is organic, just cognizant you've acquired that AUD 655 million of revenue through FY 2024. Trying to get a sense of how much EBITDA you think is gonna come from that total revenue stream that flows through. In other words, what's organic versus acquired?
That's, I think you.
Yeah, look, we haven't quantified that, and I don't think we're really in a position to on this call.
I guess the assumption, though, is that you are assuming at least some degree of organic growth. Is that fair to say?
Yes, that's.
Yeah, no, fair to say, and we've given some guidance in that earnings slide when you have a closer look at that. I think Colin's gone through some of the 2025, 2026 effects. Certainly, the two big acquisitions in Switzerland, it'll take some time for those to go from a close to zero margin to what we would expect, and probably the weighting of that is probably more into 2026 than 2025. The businesses in Germany, if you go back and look at the announcements, they're good, solid, profitable businesses. So there's a contribution from those in the numbers. You can probably work it out.
Sure. And then just on, again, back on this discussion around cash flow and debt levels, and considering the high final dividend for FY 2024. So you've given EBITDA guidance, you've given us interest and tax, you've given us CapEx. Running all of that through, I think effectively we get to a point where, once again, it looks like net debt will go up to fund that high dividend payout. I mean, again, Chris, from your perspective, you're happy to sort of eat into that debt headroom to cover the high dividend? Just have thoughts on, as you say, capital management and interest around the sale and leaseback. But for FY 2025, is there an expectation that any further acquisitions, we're still gonna see net debt increase at the end of the year?
Yeah, look, I don't, just off the top of my head, I don't think you've got that quite right. I don't think that net debt all other, you know, no other acquisitions should be the right outcome. It's probably, it's better than that. We feel pretty comfortable with the dividend strategy. You might remember, if you go back in 2021 and 2022, our payout ratio was, had a three in front of it. It was like 30%, 33% or something. So while this payout ratio is relatively high, you know, we feel comfortable that with the growth we're expecting in profitability, we can keep our progressive dividend and without borrowing to give effect to that.
So yeah, we're pretty comfortable with the position going forward and the maintenance of that policy.
Great. Thanks, guys. That's all I had.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Laura Sutcliffe from UBS. Please go ahead.
Hello. Thank you for taking my questions. Could you talk a little more about the work you still have to do to optimize your Australian collection center footprint? Is the 50 that you've achieved in terms of closures over the last few months more than you were expecting, less than you were expecting, and is there any more to come?
Yeah. So I can't give you a definitive answer there, Laura, but only to say that what I've said to one of the previous questions is that we are looking very closely at our collection center portfolio and being very stringent with the template and model that we use to determine whether it makes sense to run a co-located collection center. And obviously, that is dependent to some extent on the rent that's paid and how those can be negotiated, how they're viewed in terms of the government, et cetera. So you know, I would say that it would be our intention to continue reducing collection centers where possible, and I'm pretty certain that will continue. And particularly in the co-located collection center group because, as I said before, I just think there are.
In an industry like the pathology industry, which has not, in our view, been adequately funded over a long period of time, the impost of too many collection centers is one way of addressing that problem and reducing your costs.
Okay, understood. And then just looking at your press release from this morning, I'd like to ask about the cash collections issue in the U.S. that's caused by the changed healthcare event. At what point do you think that's fully resolved? And what are the main reasons those debts can't be repaid fairly quickly?
So, we are now back to billing in all of our divisions in the U.S., but that's a fairly recent thing in just the last few weeks. So that will resolve over coming months, and we will start to repay the advances that we've received as we collect the cash from our customers.
Okay, and then maybe just finally.
I suspect it will take most of this financial year to shake out, given the.
Okay.
The level of work required.
Okay, and then maybe just finally, could you just talk a little bit about the CapEx that's required for your plans for the imaging division versus where else you might deploy that money in the coming year to two years?
So we've called out that there are a number of greenfield expansions, both in 2024 and 2024 to 2025, but there generally are greenfield expansions every year. So you know, I think, you know, we usually talk to a rule of thumb of CapEx in radiology of something in the order of about 8% of revenue, somewhere around that, as sort of the long-term average, and that includes both growth and maintenance CapEx.
Great. Thank you.
Thanks.
Thank you. Our next question comes from the line of Steve Wheen from Jarden. Please ask your question, Steve.
Thank you. Can you hear me? Because that was cutting out. Just.
Yes. Yes.
Yeah, yeah. Okay, thanks. I just wanted to focus on the U.S., and in particular, your peers are calling out some concerns around the FDA's involvement with, and the ruling around, their oversight of lab-developed tests. I just wanted to get your perspective on that and, the likelihood of it proceeding the rule as is, and whether or not it has any implications for your business.
So just off the headline, it does not affect our business to the same extent that it might affect our major competitors in the U.S. I think there's a long way to go before this actually can become law. And, you know, within our U.S. division, there is no major concern at this point, and it might be that we have a different mix of tests compared to our major competitors over there.
Yes, I think there's another issue in that we a lot of our tests are approved by the New York State, and one of the proposals in this new system is if it's been approved by the New York State, then the FDA doesn't stick its nose into regulation.
So certainly the feedback from our team is that they, even if it happened, they don't see any significant impact on our business. Steve?
Yeah, okay, and just as an example, the testing, like ThyroSeq, that you've got, is that something that would be captured? I know there's some grandfathering of this, of tests that are already in operation, but is that something that might. I'm just sort of looking for examples within your business that might apply.
So that would have applied. However, as Chris mentioned, so ThyroSeq has New York State approval and therefore effectively be grandfathered. But you're right, that's the sort of test that could be caught under these provisions.
And it took us quite some time to get that approval because it was a new, unique test, but we have got it.
Yeah, yeah.
New York almost runs their own little mini FDA. It's a source of frustration, but it's just the way it operates.
Okay, understood. And sorry to ask just, you know, two other questions, again, raised by your peers, but just it's interesting. Your business is obviously quite different to theirs, so it's important to understand how it might affect you. But one of the issues was that they're starting to see the impact of higher doubtful debts in the U.S. because of deductible levels in various insurance policies are increasing. The deductible balances, sorry, is increasing. And so, is that playing out in your business? And then secondly, the composition of testing that you do for pre-employment, they're seeing a lot of pressure in volume there. Just wondering if that's having any impact on you as well.
We haven't seen any evidence of doubtful debts, issues or any change in trend there, if you like, and then on the pre-employment, I don't think we do much of that work in the U.S. market.
We don't.
Haven't seen an impact from that either.
Great. That's all from me. Thank you.
Thank you. Our next question comes from the line of David Bailey from Macquarie. Please go ahead, David.
Yeah, thanks. Good morning. Just on page two of the financials, explanation of results, there's usually a constant currency P&L there. Just wondering what the impacts of FX were in the fiscal 2024 for both EBITDA and NPAT, please?
So we didn't bother including that this time around because we didn't give guidance on a constant currency basis as we usually do. So, particularly relevant measure, and there wasn't a lot of movement. You can see the impact on revenue if you go to page 4 of the Appendix 4E. We show the constant currency revenue there at AUD 8,685 versus statutory revenue of AUD 8,967. So there was a bit of a headwind in the year, but it's not all that material. And certainly, as you get further down the P&L, it gets much less significant. So don't have those numbers in front of me to give you the exact numbers, David, but they're not hugely different from the statutory numbers.
Yes, the decent benefit to EBITDA and NPAT in the first half. And then maybe just in terms of the cash flow, there's a proceeds from sale of non-current assets stepped up to AUD 150 million. Just interested as to what's driving that.
So the biggest factor in that is the sale of that U.S. West division that we've talked about.
Yeah, right. Thanks.
Thank you. Our next question comes from the line of Andrew Paine from CLSA. Please ask your question, Andrew.
Yeah, morning. Thanks for taking my questions. Just, you spoke about margin upside from the Swiss acquisitions, and I understand you're not able to give specific margins, although I think I did hear you say that they're close to zero, but it'd just be good to get an idea of the magnitude of the uplift in margins that you're expecting in this region, and as a bit of an extension to that, you also said all businesses looking to grow margins. Just trying to get an understanding of what regions you expect higher margin growth, given the plans within each of these businesses.
In the Swiss case of the Swiss businesses, you know, I just say off the top of my head, that coming from zero EBITDA margin, we would like to see those heading up towards 20%, but that's gonna take some years. It'll take one to three years. And, you know, in a steady state situation, that's assuming nothing untoward happens in the interim, which gives us a lot of upside there. And the second part of your question is that, you know, all our divisions are working incredibly hard to raise margins. I mean, that's where we're at. You know, we've come off this crazy period of the pandemic, four years or a bit more, and now is the time to start growing our margins.
And as Paul pointed out a bit earlier, we've got some good lead evidence that we are back to margin expansion when we compare H2 to H1, and we would certainly expect all our divisions to be working towards margin expansion, and that's what we're expecting.
Okay, so, are you able to provide kind of any insights on to the actual regions that are, you know, expected to outperforming in terms of margin expansion?
Yeah. So, as you know, we don't give the market any sort of earnings by division. I think Chris or Paul mentioned that, there's quite a lot of headcounts still to come in the U.S. And, I guess.
We have mentioned, Colin, the earnings updates and specific things that you can pick out that you'll be able to tell which countries they relate to. And it's probably fair to say that the leverage benefit you expect to get is always stronger when you've got strong revenue growth. So if you look at each of our countries, you'll see some have got. You know, they've all got pretty strong revenue growth, but some have got better than others. And so you'd like to think in an environment where we're, if we're keeping reasonably good control over cost, and if we're growing at 7, 8, 10%, then you'd be disappointed if you didn't grow your margins in that scenario.
And then you've got to add to that, the impact of synergistic acquisitions, which, you know, will actually swamp organic growth, and synergy capture as well. So, you know, if you look at a country like Switzerland, there's potentially a lot of upside there, just from what we've said about the mergers and from the acquisitions that we've made.
On the flip side, obviously, the NHS contracts that we've won in the U.K. do tend to be at a lower margin than our average margin. And so there is some dilution from those contracts. They're earnings enhancing, return enhancing, but they are at a lower margin. So the U.K. margin will look a little different with the additional revenue from those contracts.
Yeah. Okay, that all makes sense. Thanks. And just one other thing, following your earlier reasoning behind the sale of the West Division. You said there aren't any other businesses that are facing similar issues, but are you considering any other sales, even if, you know, they're not loss making but maybe lower growth areas?
No, we're not.
Okay. That's clear. Thank you.
Thank you.
Thank you. As a reminder, to ask a question, please press star one one on your telephone keypad. I'm showing no further questions now. Thank you very much for all your questions and with that, we conclude today's conference. Thank you for your participation. You may now disconnect.