Welcome to Sonic Healthcare's full year results presentation. I'll now hand you over to Dr. Colin Goldschmidt.
Thank you very much, good morning, ladies and gentlemen. I want to welcome you all to Sonic Healthcare's results presentation for the financial year 2019. That's the year ended 30th of June 2019. My name is Colin Goldschmidt, CEO of Sonic Healthcare, and I'm joined today by two of my colleagues, Mr. Chris Wilks, Sonic's CFO, and Mr. Paul Alexander, Sonic's deputy CFO. I plan to take you through the results presentation, which I hope you have with you, and then following the presentation, Chris and Paul will join me, to discuss any questions that you might have. If we start with slide number three. Sonic's constant currency EBITDA growth for the year came in at 6.7%, which is in line with our revised guidance, which we issued in February this year at the half year results release.
Just as a reminder, at the half year, we upgraded our underlying constant currency EBITDA growth from 3%-5% to 6%-8%, to incorporate the acquisition of the Aurora Diagnostics business, which we completed on the 30th of January this year. This full-year result does include five months of that Aurora acquisition. If we move to the statutory results, these are results now in actual currency. Our revenue grew by 11.6% to AUD 6.2 billion. The EBITDA grew by 13.3% to AUD 1.1 billion, and net profit grew by 15.6% to AUD 550 million. Now, just as an aside at this point, and with your forgiveness, I just want to take a moment, really on behalf of Sonic staff, because I know that there'll be quite a few listening on this call.
To say to them that 2019 will go down as quite an important year for us, in our evolution, because this is the year that we actually exceeded AUD 1 billion of EBITDA, and that's both in constant currency and actual numbers. We've generally not been a company that crows about successes, but reaching this AUD 1 billion EBITDA mark is a great milestone for the company and really a magnificent achievement for all of Sonic's people, starting with our hardworking board, all the way through to our leaders throughout the world and all our staff right round the world. I'm sure we're going to find a bit of time to pop a bottle or two of bubbly to celebrate this occasion. Okay, that's it. Moving along and back to the headlines.
The board has ratified a AUD 0.02 increase to our final dividend, which now goes to AUD 0.51 per share. That's a 4.1% increase, which brings the full year dividend up AUD 0.03 to AUD 0.84, which is 3.7% up. The year was marked by the strategic acquisition of Aurora Diagnostics. As I mentioned, that deal completed in January. A big deal, in fact, the biggest deal in Sonic's history with revenues of AUD 450 million and a purchase price just north of AUD 750 million. The year also saw a rare strategic divestment. Traditionally, we're certainly not a company that sells businesses, but we divested the technology platform, GLP Systems, and that was recently in June of this year, just two months ago. Really a summary statement, is that the company has strong growth momentum with significant opportunities ahead.
If I could maybe just make a statement about the overall position of the company. If you look at the global operations, we are in a strong, stable, and healthy shape as a company. We're currently in eight countries. We employ 37,000 people, and all our people are very actively delivering what I can only call essential healthcare services of a very high quality, and delivering these services to, our last count, it's more than 120 million patients each year. Very importantly, our medical leadership model continues to strengthen and resonate around the world, as the preferred way to deliver what we think is the best patient care. We're very fortunate to have outstanding leadership teams in all the countries in which we operate. When I talk about leadership teams, these are experienced healthcare experts who are committed to Sonic's culture.
Our turnover at senior leadership level is very low, and that gives us a big advantage as a company as well. A standout feature of Sonic at the moment is our strong growth momentum, both at organic growth level and very particularly at M&A level, as well as JV partnership and contract levels too. We do have a rich pipeline, and it's actually a pretty exciting time at Sonic Healthcare right now. If we could move on to Slide 4, where we tabulate the headline numbers. Just to take you through the revenue and EBITDA from the actual numbers through to the underlying numbers. The revenue was AUD 6.184 billion. We've corrected for the one-off gain from the sale of GLP Systems, and then added back the AUD 9 million from the new accounting standard, AASB 15, because it wasn't there in the previous year.
AASB 15, you're probably familiar with, and that's the one where doctor contracts are no longer amortized as an intangible, but rather as an offset to revenue. That gives us an underlying revenue of AUD 6.143, and we will refer to that number a bit later. Similarly, with EBITDA, the number was AUD 1.075 billion. Again, we've corrected for both the one-off gain from GLP Systems sale and the new accounting standard, and we've added back non-recurring costs. If you go to the text, you'll see the second major bullet point where we list out the non-recurring costs are predominantly acquisition related and contract related, but also related to laboratory relocations, mergers and restructuring. Our net profit, which we've already mentioned, grew at 16%, and the earnings per share grew at 9% and sitting at AUD 1.22 per share at the moment.
Just a few points on the text to the side of that. Group-wise, our organic revenue growth came in at 4% on a constant currency basis. Just a reminder that our revenue was reduced by AUD 33 million because of the merger of our U.S. Midwest business, where we've converted to a minority position. That's the ProMedica joint venture. We're sitting now at 49%. We've mentioned our constant currency EBITDA growth. Also to mention that our EPS obviously was affected by the equity raise to fund the Aurora acquisition. This was an equity raise completed around mid-year where we issued something like 45 million new shares in both an institutional placement and a share purchase plan, to raise something like AUD 770 million, something like that. Oh, sorry, AUD 930 million. It was AUD 770. AUD 930 million total raised in that raising.
The bottom bullet point talks about our cash generation, which was strong this year. Came in at AUD 847 million, which was up 10% on the prior year. Our EBITDA conversion to cash flow is sitting at a healthy 102% after adjustments for the non-operating cash items. Moving to Slide five and our guidance. Just a note at the top that the guidance this year excludes any impacts from the other new accounting standard. This is AASB 16, not to be confused with 15. This new accounting standard, which is effective 1 July of this year, refers to lease payments which have previously been expensed through the rental expense line on the P&L, but are now going to be accounted for on the balance sheet and amortized over the period of the lease.
Our guidance, we are giving at 6%-8% EBITDA growth on a constant currency basis on an underlying FY 2019 EBITDA of AUD 1.052 million. There's a box at the bottom which explains that the actual underlying EBITDA number for 2019 will be reduced by AUD 9 million to take into consideration AASB 15, given that it's now going to be present in all years going forward. Other points around our guidance. Our interest expense is going to increase by about 3% on a constant currency basis. Effective tax rate around 25%. Importantly, our capital expenditure we expect to be significantly lower in FY 2020 over FY 2019, which was a little bit higher than normal. That's a significant budgetary matter, even though it's at CapEx level. Of course, our guideline considerations, which we've given before, we exclude any future acquisitions.
This guidance does incorporate the U.S. PAMA fee cuts, it's approximately 2% of total group EBITDA. We assume no other regulatory changes. We also assume that current interest rates prevail, we make the point that on current exchange rates, our EBITDA guidance would actually be enhanced by a further 3%. Right. The next slide is the dividend slide, I've already mentioned the numbers. The final dividend is going to be franked at 30%, compared to 20% for the interim. Record and payment dates are there for your information. The DRP remains suspended, particularly in light of the major equity raise which we completed mid-financial year for the Aurora acquisition. On slide seven, we've provided a full year dividend history chart again, just for your interest. I guess I can call it a progressive dividend policy or performance.
I think I was a little hesitant a year ago, but I've read up the definition now, and I think it does fit. Our dividend has never gone backwards, but we did have two years, 2009, 2010, 2011, where it stayed constant. The point I want to make is that the board of Sonic remains very committed to this progressive dividend policy, under which we aim, obviously, to increase the dividend per share each year. On the following slide eight, we've provided a revenue chart going back to the start of Sonic Healthcare in 1988. We've provided it for a few reasons. Firstly, to give a perspective over the 32 years of Sonic's history. It is interesting to have a look at it, especially for many of us who've been around for a while in Sonic.
Just out of interest, if you look back 20 years, our revenue was, that is 1999, the revenue was AUD 200 million. We have made huge leaps in 20 years. I think it has gone up more than 30-fold. Another reason why we are presenting this is to highlight, I guess the AUD 6.2 billion of revenue and the jump from the prior year of AUD 5.5 billion. That AUD 700 million increase between the 2 years does include 5 months of Aurora. It includes some FX tailwind, it also includes AUD 50 million in gain from the sale of GLP. A big jump up with the company very much in growth mode. I guess the chart also gives us an indication of FY 2020 revenue prospects.
I do need to make a disclaimer, and I want to stress that AUD 6.7 billion is illustrative only based on market consensus, including market consensus FX assumptions, but it should not be read as Sonic guidance. That estimated AUD 6.7 billion will include a full year of Aurora, but we assume no new acquisitions have been included in that AUD 6.7 billion. Slide nine is the usual revenue split in a pie chart that we provide. It's provided as statutory revenue by country and major division. I guess, just as a note, the pie chart does not include interest income of AUD 7 million, this is in the box below, nor the AUD 50 million one-off gain from the sale of GLP Systems. If you sum up all these segments, you won't get to AUD 6.184 billion as we've reported.
You'll actually get to 6.127, which is the 57 that's not included in the pie chart. Point of interest on the pie chart relates to our U.S. business. At the half year, we did predict that our U.S. Pathology Division would draw roughly equal with our Australian Pathology Division, and you can see this now clearly on the chart, both sitting at about 24%. Looking ahead, our U.S. business will move clearly into the number 1 revenue position as our largest division in FY 2020 and beyond, because our expectation is that there is fairly significant growth ahead in that market. In FY 2020, Sonic Healthcare USA will include a full year of Aurora and, of course, prospects for substantial growth in general, which are very encouraging, and this will be growth at organic M&A and hospital laboratory partnership and JV levels.
I guess just one other point of interest from this pie chart is if you look at the total revenue, 61% of that total revenue is currently international, with 39% of our revenue in Australia. If you then look at pathology only or laboratory medicine, so if you take out SCS and take out imaging, then 72% of Sonic's revenue is international, with 28% Australian. This is really good news for Sonic. It's good news that our international revenues are set to grow, even stronger than they have grown so far into the future. We really do expect that ratio of international to Australian to increase significantly in years ahead. Moving on to slide 10. A few points about our Australian pathology division. First of all, the financials.
Organic revenue growth came in at 5%. We believe that represents small market share gains, given that that number is above the annual Medicare number. We've shown earnings growth and margin accretion once again. This is largely due to what we believe is healthy organic growth and the stabilization of collection center costs and ongoing scale and synergy benefits that we continue to work on in the division. Of course, that does include savings that we get out of procurement initiatives. As far as the operations go, we've actually closed around 60 collection centers through the financial year. There is also a stabilization of rents. In some cases, rents have reduced slightly as well. We've relocated successfully into a brand-new state-of-the-art lab in Adelaide in the second half of the year. We are continuing with the national rollout of our total lab automation system, that's GLP Systems.
Adelaide has been completed, and Perth is imminent. We also have proprietary IT solutions delivering ongoing efficiency gains, especially in the front end of our labs. Our Sonic Genetics business is moving ahead strongly and is positioned well. We do boast the largest team of genetic pathologists in Australia. I have to say that we're extremely proud to have an outstanding team in this Australian pathology division. The team includes an amazing 400 pathologists, which is quite incredible. There is no peer, no single company that even comes close to that in Australia. In addition to the 400 pathologists, we've got thousands of qualified scientists and thousands of other staff, all vital to our operations and all driving our medical leadership model, and pushing our differentiation in the market further as we move into the future. Turning to the USA, first of all, the financials.
The revenue came in at 18% on a constant currency basis. As I've mentioned, that does include five months of the Aurora acquisition. Organic revenue growth was 5% for the full year on a constant currency basis. Of course, the revenue and earnings have been impacted by the PAMA Medicare fee cuts, which we've spoken about before. These were slightly higher in the second half, therefore, a slightly more weighted effect in that second half. Just a quick mention about the Aurora acquisition, even though we've covered it before. This was completed in January 2019, and the integration of the business is proceeding extremely well and very much to plan. It was a pretty important step, this acquisition for Sonic, as you would imagine. It's an outstanding business that is culturally very aligned to Sonic. Of course, it represents a major step for us into the U.S.
anatomical pathology market, which we estimate to be in excess of $10 billion. It also provides us with a strategic platform for future growth in anatomical pathology and clinical pathology and the hospital laboratory market. It's all pretty well related and hanging off involvement in the anatomical pathology market. As I've stated before, we really value highly the 220 Aurora pathologists that came with the deal who are now very much part of Sonic. They're Sonic pathologists now. This is a vital step for us to push our medical leadership model in a much more concentrated way in the U.S. market in general. A few points about our operations. We have completed successfully the installation of Sonic's Apollo IT system into our MidSouth Division in Memphis, Tennessee, and in fact, in the whole state of Tennessee.
This was a huge achievement, nothing easy about it, where our U.S. teams were incredibly appreciative from the assistance that was given by Australian Apollo experts who spent time in Memphis making this such a successful launch. Of course, we do have plans to extend Apollo as a laboratory information system into other parts of our business in the U.S. I've mentioned that our pipeline for acquisitions and hospital laboratory opportunities are rich. We're certainly in the midst of something very exciting in the U.S. market in terms of potential growth. We're involved very much in a billing enhancement project, which we have mentioned before. I also just wanted to mention that following the Aurora acquisition, our exposure to PAMA reduces from what it was, somewhere closer to 20%, now down to roughly 12% of total U.S. revenues.
Just to end on the U.S., I also want to mention, because this is one of our big divisions, that we do have an outstanding team in the U.S.A., where our medical leadership model and culture really is providing increasing differentiation from our competitors. We've got a growing team now of approximately 300 pathologists in total, together with very committed managers and, again, thousands of scientists and other staff who are driving our growth in this very large market, that is the U.S. lab market. Moving on to slide 12 on Germany. The constant currency revenue growth came in at 3.5%, and both our revenue and margins were impacted by regulatory changes, which commenced in April 2018. Just as a reminder, those included the EBM or statutory insurance fee changes, as well as regulatory changes to the referrer bonus payments also under the EBM system.
Just again, another note to remind you that our EBM billing is approximately 40% of our total revenues in Germany. What we are finding, following those changes in April 2018, is that our organic revenue growth and our margins are trending stronger in recent months. It's likely that we could be cycling through the doctor referral bonus changes, and we're keeping a close eye on the EBM fee changes as well. Signs are somewhat encouraging in the last few months. A few notes on our operations. As we have announced before, the Trier acquisition from July 2018 has now been successfully integrated, and we've commenced with synergy activity flowing from that acquisition. Just if you remember, that was a roughly EUR 20 million revenue per annum acquisition.
That Pathologie Trier acquisition, whilst on a smaller scale than the Aurora acquisition in the U.S., also represents an important step for Sonic in the German laboratory market, because it signals our expansion into the German anatomical pathology market, which we estimate to be in the order of roughly EUR 1 billion per annum. In Germany, like in the U.S., we have an active pipeline in both anatomical pathology and in the clinical pathology markets. Both of these markets remain pretty fragmented, we have significant opportunity to capitalize on that fragmentation as we go forward. We've also got a large number of efficiency projects in progress, including a number of laboratory mergers and relocations. If I could end, I'm not going to make comment on the smaller divisions, but a comment about our third large division in Sonic, the Sonic Healthcare Germany business.
We are extremely proud of the achievements to date in our German business. We have an excellent team of roughly 300 pathologists in Germany, 300 PhD scientists, and again, together with thousands of lab scientists and other staff, all underpinning our excellent service and our medical leadership culture. I guess to end, we can say that the regulatory environment in Germany remains unchanged as we speak. Moving on to the next slide, which is U.K. and Ireland. We achieved 9% organic revenue growth on a constant currency basis in this business, which includes the Barnet and Chase Farm Hospital contract, which commenced in October 2017. We're still on the tail of that addition. Our business in the private non-NHS market has been particularly strong.
That market is an amalgam of the so-called Harley Street market, where private specialists refer us work, and the many private hospitals that we service as well. In addition to that, we continue to optimize our operations in our fantastic new lab in the Halo building in central London, including the integration of Barnet Chase Farm. In addition to that, we're currently on the cusp of merging our two NHS partners' facilities into one to form the U.K.'s largest histopathology laboratory. We'll be merging the histopathology departments of UCLH and Royal Free into the 60 Whitfield Street location, which is where TDL and Sonic's lab used to be before we moved into the new Halo site. Some good news and a real win for our U.K. team, that we've recently won an NHS contract to provide HPV testing or screening for the whole of London.
This is approximately GBP 15 million per annum contract with an initial term of five years. It's going to be a progressive start somewhere around the end of this calendar year, beginning of next calendar year. This really is great news and a great win for our U.K. team. I wanted to just say that Sonic's extensive women's health experience in Australia and our integral involvement here in Australia in setting up the HPV screening program did assist greatly in the London bid and will be of enormous value going forward. This is a really nice example of Sonic global synergy at work. This London HPV contract is not only valuable, but it's one that carries a lot of kudos for us as a company. The prospects for ongoing growth in the U.K. are very promising.
As an indication of that, we're currently bidding on NHS contracts with potential revenues in excess of GBP 150 million per annum. It really is quite encouraging to see the increasing growth momentum for Sonic in the U.K. market. When I look back at Sonic's U.K. revenues, say, 10 years ago, 2009, when I checked, I think it was around GBP 103 million per annum in the 2009 year. Revenue has quadrupled in 10 years, and our momentum is certainly gathering pace, which is really good news. Moving on to Switzerland, the financials were good. Organic revenue growth was 4%, and we've achieved strong earnings and margins growth once again. As far as the operations go, the Zuger Kantonsspital, which we announced a new contract, which commenced in January of this year, is operating to plan. We've got a number of IT and e-Health solutions supporting high-level services.
We're a leader in genetics in Switzerland, too, which is a great feather in the cap for Sonic in Switzerland. In addition to that, there's a large range of workflow and efficiency programs in operation across the multiple sites which we operate in Switzerland, and the regulatory environment remains stable. Just to note that we are the number one player in the Swiss pathology market, and our businesses in Switzerland, both of them, are performing to exceptional standards at both operational and financial levels. Belgium, everything is stable in Belgium and really tracking more or less to plan. The revenue was essentially flat, but that was due to a targeted fee cut in the period. Everything else is pretty stable. Operations stable, regulatory environment stable. Moving on to slide 16, Sonic Imaging.
The imaging division continues to form strongly with 6% organic revenue growth and 7% earnings growth, meaning that we've achieved margin accretion in this division. As far as the operations go, we received only three MRI licenses out of a full 53 that were recently granted by the government. That didn't worry us too much. Our projects continue to realize synergies. We're expanding via a number of ways, including greenfields, expansions, and new modality opportunities. Of course, we're investing in equipment and technologies to improve our services and our efficiencies. The regulatory environment is stable and potentially even positive with the introduction of fee indexation from July 2020, which is going to affect about 80% of the Medicare imaging schedule. We continue to work via our industry association to try and get this to 100% of the Medicare schedule.
We believe that indexation is important for all the work we do in imaging. Slide 17, which is Sonic Clinical Services. SCS represents about 7% of total Sonic's revenues. We are by far the largest primary care operator in Australia. We have 233 medical centers and approximately 2,400 partner GPs working in those centers. We continue to work on optimization of our medical centers, including the consolidation of centers where possible in order to gain benefits of scale. Our GP recruitment continues to be successful as well, with the net addition of about 85 new GPs net in financial year 2019. These GPs are now all working in 233 centers, which is actually five centers less than a year ago. We're seeing strengthening of our financials in the business. This was coming through in H2 FY 2019, and the regulatory outlook is stable.
Slide 18 is a slide that we usually present showing our capital management. Just as a note to this slide, a reminder about the equity raise of AUD 928 million in the middle of the financial year. Post this equity raise and looking at our debt metrics at 30 June 2019, which you will see in the table, our total net interest-bearing debt is down by around AUD 200 million. Although this is pre-dividend payment. Our equity is up, our gearing ratio is down, it is now below 30%, and our interest cover is up, and the debt cover is down. All pointing to a very healthy balance sheet in capital management. We make a note there that our current cost of debt is sitting at around 2.7%, and current available headroom is approximately AUD 1 billion, and that is after the final dividend is paid.
Moving on to the final slide, the outlook. I'm pleased to say today that the company is in a strong, stable position and well-positioned for ongoing and strong growth. We do have a rich pipeline of opportunities ahead of us, acquisitions, joint ventures, and contract opportunities. Our balance sheet is strong, and we've got significant headroom for expansion. In fact, we've got AUD 1 billion worth of headroom to support that expansion. In fact, these three bullet points probably are a very good summary of Sonic's current position. I believe that we're on the cusp of major growth, certainly in my mind. Perhaps the best opportunity for growth we might have had in our history. It's taken many years, possibly even decades, to reach this growth potential.
As you'd understand, we've had to establish infrastructure and a medical presence in the major markets of Australia, the U.S.A., Germany, Switzerland, and the U.K. Even more important than that, it's taken a long time to establish a critical mass within Sonic. We now have 37,000 staff, and we have something like, it's more than 40 operating companies. To develop our unique medical culture, it's taken a long time. This is our medical leadership model. We found that increasingly, this model resonates strongly with our own people and with external customers, that's with doctors and the medical community at large. All of these have come together and have put us in a somewhat unique position to make accretive acquisitions, to form partnerships, and joint ventures, and to win contracts in our key global markets. We're expecting Sonic's growth to continue and even to accelerate.
We've now entered the anatomical pathology markets of both the U.S.A. and Germany. These are both very big markets. The U.S. market alone valued, as we've said before, around $10 billion U.S. Not to forget as well that we continue to source acquisitions as per normal in the much larger clinical pathology markets too, again, particularly in the U.S.A. and Germany. We've also got big opportunities for partnerships and joint ventures in the U.K., must not forget that, and the U.S.A. Of course, at the base of our global business, we benefit from a diagnostic industry that is itself growing. When you couple that with our strong underlying organic growth, which hangs off our strong and differentiated market position.
Returning to the bullet points, we've mentioned before, the great value of our geographical diversification, which not only gives us risk mitigation, but gives us opportunities for growth. You can see it now where, whilst we may be out of acquisitional growth opportunities in, say, Australia, we've got huge opportunities in the U.S. and in Germany as examples. We're very fortunate to have stable, outstanding, and dynamic global management teams. I cannot stress that point enough. We also are at the cutting edge of technology and bringing in innovations all the time to drive efficiencies in the business. I guess on the cost side, we're always looking to sharpen up the company, particularly in the area of procurement, but also in a whole range of synergy initiatives that are going on throughout Sonic at any one time.
I should end by just saying that how proud I think everyone in Sonic is that we now have a global team of more than 1,000 pathologists. I think I've said this before, that I don't believe there is a company in the world with that many pathologists on board. We have more than 200 radiologists, and we've got thousands of qualified technical staff and non-technical staff as well, all of whom underpin Sonic's medical leadership culture. Really, who are not only highly capable but also fully engaged, if not excited, to take Sonic forward into the future. So thank you very much. I'll now return you to the operator to coordinate the questions and invite Chris and Paul to join me. Thank you.
Thank you. We do have a few questions here in queue. We will start with the first question from David Low from JP Morgan, Sydney.
Thanks very much. Colin, if I could start with where you ended. You certainly talked a very large opportunity on the acquisition front. As you'd know, we're sort of looking more towards bolt-on acquisitions that can add incremental improvement or synergy benefits quite quickly rather than sort of new beachheads. I was wondering if you could talk a little bit to that as to what Sonic is now targeting, sort of post the Aurora acquisition and post the acquisition in Germany, please.
Yes. Thanks, David. The answer to that is that we're not really confined to one particular segment, in terms of M&A. Yes, we continue to look for bolt-ons, and particularly in the clinical pathology market, where you do get the one plus one equals three synergies. We're also open to bigger acquisitions, such as the Aurora acquisition. Of course, now that we have made a statement of entry into the anatomical pathology market, there could be other acquisitions that you may not classify as bolt-on, but they may be medium and some even bigger. This applies in both the USA and Germany in particular. We're not saying anything about new geographies at this point, but of course, at some stage in the future, I'm sure that's going to become an opportunity for Sonic as well as other countries become suitable for us.
Just to finish with the answer to your question, there are sizable opportunities outside of M&A in the area of partnerships and joint ventures, and particularly in the U.S.A. with hospital labs and in the U.K. with NHS. Those are the real big opportunities. There's also contract wins, just straight contract wins, which generally are not going to be as big as medium to large acquisitions as well.
Just to finish up on that, do you think it's likely Sonic will come back to the equity market in the next, 12 months or so?
No, I think it's very unlikely. We're sitting with AUD 1 billion of headroom, strong balance sheet. The answer, as definitive as I could be, no.
If I could just ask one other on a different topic. In the first half, we saw quite a significant or a reasonable contribution from the billing system enhancements in the U.S. I was just wondering if you could talk to what came through for the full year and what we should expect on that front, in 2020 and beyond, please.
Chris is going to take this one.
Yeah, David, look, there was probably a bit more from that because it was a bit of a step-up in the way we look at our receivables from initiatives that happened in the first half. We've got a team of people working on that project. It's probably got a few years to run yet, and it'll be a sort of, bit of a stepwise process as we implement new systems, including things like systems that enable us to take credit cards up front from patients. We can't actually charge them because we don't know what the charge is up front, but our competitors had that sort of system in place for a while. We're sort of playing a little bit of catch up on things like that, but those sort of benefits will start to flow through in the years to come.
We had probably more than normal because we had about an 8%, or a little, just a little less than 8% in the first half growth, more like 3% in the second. That was also suffering a bit of the full PAMA 10% effect on Medicare that started in January 2019. There are a few different effects that weighed on the first and the second half there.
Just the 5% organic revenue growth reported, what proportion of that would have come from revaluing receivables?
It's not so much a revaluation, but it's more recognizing that we're bringing more cash in than we had in the past. Look, I don't know, I don't want to mislead you, but there's probably a bit over 1% or so from that source. Might be closer to two, something like that. Not hugely material in the scheme of Sonic more broadly, but still very positive for the business in the U.S.
The synergies have been going on. Are we going to see the same again next year, or FY 2020, do you think?
Yeah, look, hard to know. There's lots of initiatives coming through, how quickly they affect the growth in revenue, I wouldn't want to put a number on it, but it's certainly going to be in a positive direction. Just how big it is, remains to be seen.
All right. Thank you very much.
Thanks.
The next question will be coming from Steven Wheen of Evans and Partners, Sydney.
Yeah, good morning. Colin, I noticed on the slides, obviously the portfolio of Sonic is working well. You've called out the margin accretion of Australia, Switzerland, and imaging. There isn't a reference to margins in the others, does that mean we assume they are flat to negative? If not, which ones might be positive? The extension of that is, are there any of those that are turning around in terms of your guidance for FY 2020?
Paul here. You shouldn't assume anything from where we have and haven't referred to that. It's just that the countries that we've called out, or markets that we've called out, were particularly strong margin performance. You would expect that Germany, because of the regulatory issues there, that there has been some margin deterioration in that market. Likewise, Belgium, where the revenue growth is flat, that's not going to be helpful to margins as you would expect. We're always working on our businesses. We always hope that margins will improve or expect that margins will improve in coming years. Germany, as Colin referred to, we seem to be cycling through the doctor bonus changes, the outlook is more positive going forward.
In Germany, too, I think the volumes in the last few months have looked quite positive. It's the cycling of the doctor bonus arrangement, Steve, unlike a FCAPS, where you cycle from an exact date, when you've got something like the doctor bonus things, which I think most of the analysts are familiar with, that's something that's a change in behavior that happened over a period of time. It doesn't cycle in a particular month, we're starting to see some positive trends in volume. I think next year should see some benefits coming from that.
Yeah. Great. Okay. Secondly, I just wanted to ask about the Aurora Diagnostics acquisition in terms of funding. Some talk around insurers trying to take cuts to what they're going to pay. It looks fairly isolated. Just wondering what your take is from that Anthem announcement, and whether or not there's others that are contemplating that.
Yeah. Steve, we are aware that there's been sort of isolated approaches by Anthem, which, for everyone's information, is one of the managed care companies. We have not been directly involved in any of these at all. I don't think there's any evidence as yet that this is going to be spreading beyond a local phenomenon. Essentially, at this point in time, there is nothing that we're aware of like you read about Anthem in selected states. They haven't approached us.
Steve, it's Chris here. Even though Anthem might announce that they're looking at doing certain things, each one of those, as Colin said, in a region is a negotiation. Just because they make statements about things, I guess that's their position. These things often end up in a negotiation depending on what sort of leverage you might have in a particular market.
You should just bear in mind that the Aurora business has a huge number of hospital contracts, which are regarded as absolutely vital services. These are pathologists who are doing all the surgical pathology at hospitals. They have to be there. There is a lot of leverage in those arrangements, those contracts, and many ways to deal with insurers should they approach us the way Anthem apparently has. As I say, this is all theoretical because it hasn't actually happened to Sonic.
Yeah, understand. That's clear. Final question from me, just back to Australia and collection centers. Does that have an impact on your organic revenue that you're seeing, or is that fairly immaterial, just in terms of the number of closures that you've done?
Generally, the answer is no, it hasn't had an impact on our growth. We've been very selective in how we go about closing centers, for example. Obviously, we're going to be choosing the low volume centers, and where we do negotiate to close a center, we'd obviously do our very best to keep the referrals, and in many cases, we do succeed. You'll see from our organic growth number in Australia that it really hasn't had an impact at all. I think this could be an evolving trend in the whole market that I think some sanity is descending, whereby the huge number of collection centers, including in low volume locations, are reducing. I can't speak for anyone else, but certainly, that's the direction that Sonic's heading.
Yeah. Essentially, you're saying that the closure of those collection centers is a net accretion to the Australian business?
Yes. In terms of the financials, yes.
Yeah. You can see that already, which is great.
Well, yeah. It's contributing. When we get organic growth of 5% and no abnormal cost pressures.
Our normal leverage will return to the business with margin accretion. Yes, closing 60 odd collection centers certainly helps the situation going forward. Yes.
The fact that organic revenue growth was still 5% in that environment, Steven, is a testimony to the careful way our management team's handled that. It's very pleasing.
Yeah. Great. Okay, thanks very much.
Thanks, Steve.
The next question that we have will be coming from Sean Laaman of Morgan Stanley, Sydney.
Good morning, Colin, Chris, and Paul. Hope you're all well. Question on the U.K., the GBP 150 million worth of tenders. Are you able to give us a bit of a timeline on when you might know the outcomes of those, and reference that in contrast to the available capacity in the existing Halo building? That would be quite useful.
Sean, those are very leading questions. We obviously can't talk more than what we've publicly released. There are a number of large contracts that are being tendered out right now, which probably are unknown publicly, but we're not going to talk about them. Obviously, different contracts will be handled differently within the scope of our business in London or in the U.K. Obviously, we would need to make plans, if these were very big, if they were very new. It's something that we can't really elaborate upon right now because it is confidential what we are doing.
Sure.
I guess we can only tell you that there are large contracts that we're engaged with at the moment, which would be pretty exciting for Sonic and well handled by our local U.K. team, assisted by our global expertise. We'll find ways through any logistical, facility, operational, or financial issues. There's nothing that we won't be able to handle.
Sure. Thank you, Colin. Just to follow up on the collection centers, was that an even cadence of closures during the period for the 60? Is there many more to go?
Yes, it was more or less over the period of the year. Yes, there will be more to come. We're not laying down a number or a particular strategy, but in general, our aim is to optimize the efficiency of our collection network. As I've said many times before, Australia has a huge number of collection centers per capita, per anything you want to count. In terms of getting some sanity back into the metrics of the pathology industry, I think this is a natural market trend, because I think the smaller labs in particular would be struggling under the pressure of so many collection centers. We will continue assessing each collection center one by one, and that's how it's actually done.
Being careful to maintain as much of the revenue as possible at all times, and bearing in mind all the competitive issues that we face in the marketplace all the time.
Perfect. That's all the questions I have. Thank you.
Thanks, Sean.
The next question will be coming from David Bailey of Macquarie, Sydney.
Yeah, thanks. Good morning. Just firstly from me, I wonder if you could provide organic constant currency revenue growth for Germany for FY 2019. I was looking at the first half, there was a bit of growth there, but on an organic basis, it was flat. Just trying to understand what the second half looked like on an organic constant currency basis.
Yeah. There was some improvement in the second half, but modest.
Okay. Just then on Australia, if you look at the implied second half growth, it was actually 4%. Looking like you're cycling through the bowel screening contract. Is that a reasonable growth to assume on a go-forward basis?
Yeah, I think you're right. We are cycling through it. Yes, we'd be happy with that kind of organic growth. The market, we're tracking the whole industry's growth as well, and it's going through, there were periods where it appeared as though the whole market's growth was a bit low. It's lifted, perhaps as a result of the busy flu activity this year compared to last year. I think we also believe that we're taking market share in several of our markets as well. If we are growing at 4% to 5% organic in a stable situation, we'd be happy with that. Yes.
Yeah. Okay, just one quick final one from me. Just in terms of Aurora, just wondering if you could quantify the impact of that to EBITDA growth for FY 2020. Just knowing it is a seven-month contribution versus five in FY 2019.
Yeah. We haven't disclosed that, but from what we have disclosed, David, if you look at the amounts, and if you took the ratio of, we'll have an extra seven months in FY 2020 versus FY 2019, based on the disclosed number, that's probably going to give you a reasonably accurate view on what we think it's going to be.
Maybe closer to four then?
Closer to-
Got it. That's great. Thanks very much.
Something like that, yes. You mean the impact on the full year guidance?
Correct.
Yeah. If you work out those numbers, it's in that order, a bit over that, probably.
Thanks.
Thank you.
Next one we have is from Andrew Goodsall of MST Marquee, Sydney.
Oh, thank you very much for taking my question. Just the first one, just on the interest cost going up next year, I'm assuming that's largely a function of FX.
No. That guidance is on constant currency, Andrew, so it's not a function of FX. As part of the Aurora acquisition, we took out a bridge facility for something like $330 million U.S. dollars. That bridge was at a very low margin in the second half of FY 2019. There's a step-up in that margin that occurred in July, six months later. That's a significant increase in interest. There'll be a further increase when we term that out effectively when that bridge expires towards the end of this calendar year. That's the main driver in that increase. Now, of course, we've assumed current base rates prevail, in the current interest or, in the current market, there's a reasonable chance that those reduce, and perhaps we won't see the 3%. If we assume current base rates, that's the result we get at this point.
No adverse currency translation sort of thing. I guess, just you called out the Australian regulatory outlook as being stable. Any sort of update, particularly around pathology and whether the federal government is still potentially going to act on collection centers, and secondly, anything from the MBS review that proposes, I guess, to sort of rebalance some of the tests, pricing and so on.
Yeah. This is activity that's going on sort of at government levels. First of all, if we talk about the collection center activity, there is activity, but as you know, Andrew Goodsall, I've stopped talking about it because, I think it was at least five years ago, I thought something might happen, and nothing has happened. Apparently the government is writing letters to both labs and referring doctors, to deal with particular collection centers which fall into a category that the Department of Health deemed to be perhaps inappropriate. We're told that that activity will continue. It seems like there is gentle pressure, if I could put it that way, coming from government, quite independent of the labs, directly to landlord doctors, and the labs that are the lessees. Who knows where that's gonna land up? I can't predict it anymore.
In terms of the MBS review, it is still ongoing, but it's now been ongoing for a couple of years at least. There's no major activity and no obvious evidence that any changes are going to be made, which might negatively impact us or positively impact us for that matter as well. Really, I could just say that as far as the MBS review goes, the situation is stable or unchanged.
Would a re-rate or repricing to more complex tests benefit Sonic, which, I guess has a heavier volume of high-end or more complex testing?
Well, we certainly are.
If that was to occur.
We certainly are the company in Australia that, I believe dominates at that upper end. If that should occur, yes, we might benefit, but of course, I think the MBS review look at a range of issues, not just pricing of more complex tests. They look at pricing of bread and butter tests as well. Nobody knows what the mix might turn up for any particular lab. I do need to stress that there's nothing imminent from the MBS review that might affect the financials of Sonic at this point in time.
Copy. Thank you.
Thanks.
We also have a question from Gretel Janu of Credit Suisse, Sydney.
Thanks. Good morning. Sort of firstly, on Australia, you did make the comment that you believe you're taking market share in several markets. Which markets are these? Is this due to the greater shift towards more complex testing?
Gretel, I think I might have said, we believe that we're taking market share. We know what our organic growth rate is, and we do have only Medicare data to use as a benchmark against which, to assess our growth relative to the market. We believe that our 5% organic growth is above the market, which would suggest that we're taking market share. That's really all I said. I think, it's not a strong statement. As far as we're concerned, the market does not appear to be growing in excess of 5% at the moment.
That's what it appears to be. In the case of radiology in Australia, we think we're more or less at market based on the Medicare data again. At 6% organic growth, that appears to be what the market's growing at, to the best of our knowledge.
Okay, thanks. Just on the U.S., you seem to have a slower growth on an organic constant currency basis in the second half versus first half. Was this just PAMA or was there some other reason for the slowdown? In addition, can you give a bit more color in terms of how the U.S. joint venture hospital contracts are going? Thanks.
Yeah, look, it's Chris here. There was a more significant PAMA effect in the second half because the other 10% cut to the Medicare component happened on January 1st, 2019. That was certainly part of it. There's probably a little bit, I touched on it before when I think I was answering Steve's question. Probably a little bit of a slowdown on the benefits we were getting from the billing. We expect that to continue to contribute over a period of a few years. I guess separately, there's probably a little bit of a slowing in the contribution of some of the joint venture growth. It'd be fair to say that first half of 8% was a bit exceptional. I guess none of us would have expected to be able to maintain that number, but that's created a new base for us going forward.
Okay, thanks very much.
The next question will be coming from Lyanne Harrison in Bank of America, Sydney.
First question is on Imaging margins, that this increased this year by about 40 basis points. Can you add some color to what drives this in light of workflow efficiencies and synergies? Could we expect further margin expansion in 2020?
Yeah, look. Oh, you go for it, Paul. Yeah. One of the biggest drivers there is when you have greenfield and brownfield type expansion. When I refer to brownfield, adding modalities to existing sites. Initially, there's a ramp-up phase. It depends how that ramp-up is going and your reporting rates effectively against that ramp-up. That's one of the biggest drivers of changes in margins in imaging. As Colin touched on in the presentations, there are a number of other efficiency projects that we have underway with new technologies, et cetera, as well. There's other drivers in addition, but the greenfield type expansion is a big one.
Going into 2020, we can expect further expansion. Is that safe to assume?
We haven't guided to that level of specificity, so I won't make a comment on that.
Okay. Another question on your GP. You added a fair few GPs in 2019, and we note one of your peers has also stepped up in terms of GPs acquisition. Has this put any upward pressure on your remuneration?
Just to be clear, we do not acquire GPs. We recruit them.
Sorry, recruitment, yeah.
Our strategy is somewhat different to our competitors. Our disbursement rate, if you like.
has not changed significantly.
Okay. Thank you very much. I have no more questions.
Thanks.
The next one will be coming from John Deakin-Bell of DITR Sydney.
Okay. That's Sydney. Thanks very much. I just want to make sure I'm clear on the guidance with PAMA going forward. You said it's 2% of EBITDA, which is kind of AUD 22 odd million, and you've said that 12% of the U.S. will be impacted, which is about AUD 210. Are we just assuming that it's 10% of your impacted revenue and that 100% goes to the EBITDA line?
That is how that 2% is calculated, yes. The guidance allows for that 2%, so you shouldn't take that 2% off the guidance. That is the guidance allows for that 2%.
Understand. Thank you. If I do that, and I assume about 5% of the growth comes from Aurora, we get to an organic guidance of about 1%-3%, which would imply that your organic growth's gonna be lower next year and that your margins don't go up. Are you conservatively guiding or are you telling us that that is what's gonna happen?
Because Aurora's about 4%.
I've assumed five. You're saying it's less than that.
It's four and a bit, yeah, depending on, in that order. I guess if you take that out, then you've got the headwind of PAMA, so that has an undermining effect for your base business, I guess. Also there's the effect of the exchange rates, which if they stay the same, that's potentially another three. Yeah, we're comfortable with where our guidance sits. You'd have to imagine we've got budgets that well and truly back that up. If we get some outperformance in some of our markets, we might do better than that. It's hard to tell at this stage. They're the components.
Understand. Just finally, we've talked for some time about the impact of PAMA on some of the smaller players in the U.S. and the potential for there to be distressed operators who want to sell their business. We haven't seen a lot of that. It's not visible to us, really. Can you just give us an update on what you're seeing in the market?
I think it is happening, and it's still evolving, John, because you've got to imagine as I mentioned in the presentation, one of the benefits of the Aurora acquisition is that it reduces our exposure to PAMA down to about 12% of our total revenue. There are many labs out there with much higher exposures as a percentage of their total revenue to PAMA. Even some of the hospital labs are struggling with these cuts. Deals are evolving, and it's one of the reasons why we see very substantial growth opportunity in the U.S. market. I don't think you should believe that there aren't deals out there because there are. It's probably going to accelerate given that we're now in the 10% PAMA period with another 10% period to come.
This is going to be hard work for small labs and even medium labs.
Got it. That's helpful. Thanks, John.
Thank you.
We have a question from Chris Cooper, Goldman Sachs, Sydney.
Hi. Morning, thanks. Just back on the U.S. I hear your comments on PAMA. You did slow sequentially while most of your competitors actually improved over the same period despite facing a similar sort of exposure. Should we be reading anything into the different path you've chosen strategically, or is this just the sort of noise around your changes to billing, and I guess some of the slower JV flows that you've just been calling out as well?
Chris, I think we still grew better than the major competitors that you're referring to. It's just that we were coming off an unusually high positive growth period in the first half. I don't think you should be reading anything negative into that. I think we're still doing very well.
I think it's very important with that question, Chris, just to reiterate, that our strategy is now also to operate in the anatomical pathology market, which is something that not all labs can do. We've had deep experience in that market here in Australia for many years, decades, in fact. Sonic's medical leadership culture and model are very well suited to that market, which is pathologist-centric and pathologist-dominant. Through the anatomical pathology market, there will be potential to grow organically and to grow via add-on acquisitions, and to cross-sell into clinical pathology, which will be organic growth, and also to secure hospital lab deals because we're involved in anatomical pathology, which will, in most cases, also be regarded as organic growth. We have been a little conservative here, and our guidance never includes new deals.
It's very possible that our new strategy, which is a major expansion into anatomical pathology, will drive stronger organic growth going forward. If it's not in the short term, it'll probably be in the medium term, and I'm confident it'll flow through to medium and long term.
Got it. Thanks. Just on that sort of organic opportunity in the U.S. you allude to, can you give us your expectations at this stage in terms of what the market might be growing at over the next 12 months in the U.S.?
There is no information as such that we can get hands on. We are guided by our big two competitors. They're sizable chunks of the market and give us a good indication about the market itself. There's no official stats which give us market growth. Sorry, can't answer.
Sure. Just in terms of your expectation and how you've thought about guidance around that. I mean, the U.S., as you said, is an increasingly large part of the business now. I presume you have a sort of expectation, just broadly speaking, high level, in terms of what the market might do. Even directionally, but faster or slower than 2019.
I guess the second half is circa 3%. That's the most recent month's performance. I guess that's probably a reasonable guide for the future.
Got it. Thank you. Just one quick one on the collection centers again in Australia, if you don't mind. I understand this is a bit of a moving target and I heard your comments that there will be more closures to come, could you just give us some sense of, at this stage, should we be thinking more or less than the 60 that you've closed in 2019 to come in 2020, please?
Chris, we simply cannot give you that guidance because we're sort of doing this on a center by center basis. As conditions change, there might be change coming out of Canberra. It's really impossible for us to say whether it's going to be more or less. We'll obviously not go crazy with closures. We don't want to do that. In many of the situations, we're comfortable with the situation as it is. I'm sorry, I just don't want to give you a definitive answer to that.
Just to emphasize, Chris, that closing a center is almost, if you like, the last resort. Obviously, the preferred outcome is a renegotiation of the rent. What you can't see when we talk about the number of centers is in how many circumstances we've reduced the rent as well, and that's probably the more important statistic.
Could you give us some color just on that, on a sort of like-for-like basis, what rental costs did, if we exclude the closures over 2019 over 2018, for example?
It's hard to do so, Chris, because there's obviously increases on some leases as well, normal CPI-type increases.
Just across the portfolio, I guess.
Well, if you look at the overall operating lease rental expense in our P&L, you'll see that it's reduced as a % of revenue. That's probably all I'll say on the subject.
That includes the closures as well.
Yes, it does.
Yeah. Okay.
As I said, that's probably all I'm going to say.
All right. Thanks a lot.
The next one we have Saul Hadassin of UBS, Sydney.
Thanks. Yeah, Saul here. Good morning, Colin, Chris, and Paul. Just a couple quick questions. On Clinical Services, I think revenue for the year was flat versus last year. You did mention second half performance had strengthened, but there was an early and strong flu season. I'm just wondering, do you think that that business, considering your GP hires during the year, do you think that business can actually grow revenues organically into fiscal 2020?
We certainly do think that. I mean, the addition of 85 GPs makes a difference. We're also working on a whole range of initiatives to optimize both revenue and look at the cost side of the business as well. The answer is yes, that's been our steady state situation. I think the market went through a bit of a slowdown in the first half, and maybe in H2 of last year or 2018 financial year, but it seems like it's picking up. The last financial year was affected by the flu season. This year, the flu season came early and then it kind of went down again. It's a strange chart, the flu activity this year, which does influence GP attendances. The answer is absolutely yes.
Our aim is to grow the business forward, and we believe that we are in a very good position to do that.
Thanks, Colin. Just one more from me. Looking back at the U.S. segment, is the implied contribution from Aurora at the revenue line effectively the difference between the organic revenue growth and the reported? It's about 13% growth coming from Aurora, or can you quantify the revenue contribution from Aurora?
We scrambled.
Look, when we announced the Aurora acquisition, we gave you the annual revenue of that business. That with a little bit of growth is what's gone into this period. I just don't have the math in front of me that you're doing.
Yeah. The reason why I ask is I have done that math, and I get about AUD 140 million, depending on if there was any other contribution from other JVs in the year. Assuming it's about AUD 140 million, and that may be a bit high, but you've given the NPAT contribution at AUD 22 million, which implies a very high NPAT margin, certainly versus your group, about 500 or 600 basis points higher. I'm just wondering, is that just a simple reflection of the fee structure and the cost structure of that business? In other words, it's just a materially higher EBITDA and EBIT business, or is there something in that NPAT contribution?
Aurora is tracking in line with the financials that we announced when we announced the deal six or so months ago, eight months ago. That's really all I think we can say on that.
It does have a higher margin in that business than.
Than the average in our U.S. business.
Yeah, that's true.
Now, that net profit number, you're referring to the note in the 4E, is that?
Yeah, the AUD 22 million.
That's net profit after tax. There's a bit of interest in that entity as well that's come off that as well. It's not highly geared. If you're looking at versus Sonic's overall NPAT, it's disproportionate because it doesn't have gearing of any note.
Okay. That's helpful. Thank you. That's all I had.
Thanks.
We don't have any more questions in queue as of the moment.
Righto. Thank you very much, everyone. We'll end the call now.
Have a good day.