Good morning. I would now like to hand the conference over to Dr. Colin Goldschmidt.
Thank you, Katie, good morning, good afternoon, and good evening to everyone on the line. Welcome to Sonic Healthcare's interim results presentation. I'm joined this morning by my two colleagues, Chris Wilks and Paul Alexander. We're coming to you from our global office in Sydney, in Australia. I'm gonna presume that you have the presentation in front of you. If I could ask you to start on slide number three. In slide number three, we've presented for you a table of our headline numbers in the dark blue column. To the right of that, we've given you the growth numbers versus the corresponding period last year, and importantly, against H1FY2020, which is an equivalent period in the pre-pandemic, a clean pre-pandemic, six-month period.
It's important that we recognize that the comparative to last year is greatly affected by the reduction in COVID revenue. You'll see there that we've got a comparative there of AUD 379 million versus AUD 1.3 billion in the prior period. All the numbers that show negative growth are comparatives against last year, except the top row. The top row is our base business free of any COVID revenue. I guess that's the one that we can look at just for the moment because it's showing base business revenue growth of 11% against the pre-pandemic period and 9% against last year. Of course, remembering that this period does have COVID in it, and last year, the previous year does too.
Removing them gives us an idea of our base business. I also wanna be clear about what we're calling base business. It excludes COVID, and when we talk about base business revenue, we're talking about organic revenue. We normalize for working days, currency exchange rates, and acquisitions and disposals. It's a clean look at our base business. The organic revenue growth is gaining momentum. This is a good news story from Sonic's point of view. If we look at January 2023, that's the month just passed, it's up 10% against January 2020. If you look at some of our divisions, it's not quite the same in all of them, but this is a particularly strong number in our Australian pathology division.
That is up 16%, January 2023 against January 2020. We're seeing a trend, particularly in the late stages of H1, and even more particularly in the post-Christmas period, of a return to strong base business growth, in both pathology and radiology. Remember, radiology did not have any COVID in it, but of course was affected by the pandemic as well. Importantly, just going down the bullet points, our base business margins are in line with pre-pandemic levels, and we are spending a huge amount of time, not just on the recovery of our revenue, at base business level, but also at right-sizing the company in terms of labor costs in particular, as we emerge from the pandemic.
When you look at these numbers also, earnings per share is up 50% against the 2020 comparative. Against last year, cash generation is strong, including 116% of EBITDA converted to cash flow in the period. We also want to call out that we are well advanced with a number of acquisitions and contract opportunities at the moment. If we go to slide four, the board has ratified an interim dividend of AUD 0.42. That's a 5% increase on the interim dividend last year. The board is of a mind to continue our progressive dividend strategy, which has been in place for almost 30 years now, since the first dividend was declared in 1994.
This dividend is franked to 100%, record date 8th of March, and payment date 22nd of March 2023. We just unpack our revenue a bit further on slide five, and if I could take you to the chart on the right and first look at base business. Here again, we're talking about base business that is clean base business, corrected for working days, free of currency movements, and doesn't include acquisitions or disposals. This is a good look at our underlying business. You'll see that it is up 6% against the last half, that's FY 2022, and 8% up on the pre-pandemic first half of 2020. COVID revenue, if we look at the red bars, is down 72% on last year's numbers.
We've gone from AUD 1.3 billion, down to AUD 379 million in the comparative periods. What we're seeing, as I mentioned, is our base business continuing to grow. Two factors there. One, the underlying drivers of the diagnostic markets continue. There is also some catch-up testing that we're seeing in selective markets, and we're also growing market share as well. In terms of ongoing COVID revenue, it's very difficult to predict the future. We do expect COVID testing to continue. At what level is uncertain, and it will be different in different geographies. Just for your information, in January 2023, COVID revenue was AUD 32 million for the month.
Looking at January, so going past the first half, our organic revenue growth was up 14% versus last year and up 10% versus January 2020. I mentioned earlier that in Australian pathology particularly, we've got a very strong trend with organic growth at 16% versus January 2020. What we're seeing here is a quite a strong return to normal business, if I could call it that, as we emerge from the pandemic. On slide six, we wanna just outline a little bit more about cost management. Normally, we wouldn't have a slide in on this in our results presentation because cost management is an integral part of our business, has always been so.
There is particular focus that we're all putting on the management of our costs because we've gone through two and a half years of extraordinarily high volumes as a result of COVID testing. We're now well advanced with bringing our labor force back into line with normal business. We still have to cater for a small amount of COVID testing, but relative to our peaks, we are very determined to bring our labor costs right down. We have largely succeeded already. There's a little bit more to go, but largely, the job has been done. If you look at our base labor cost as a percentage of revenue, base business revenue, it is actually already in line with pre-pandemic levels. If you look at the 4D, you'll see that our labor cost growth is 7.5%.
We're keen to point out that 4% of that comes from acquisitions over the period. We will continue with labor cost control as we reduce our COVID testing further, as we predict. These reductions will largely be from COVID-related staff, such as casuals and contractor hours, but also the overtime hours that came not just from additional work, but from sick leave that was a real issue over the last couple of years. We're also looking at other areas of the business to find efficiencies such as automation, and a number of others, like consumable costs, for example, where in fact our costs have come down in HY H1 FY 2023 versus last year, and we expect those to continue.
We have experienced some inflationary pressures in categories like utilities and transport, and we are mitigating these wherever possible. Remember, these are relatively minor categories compared to labor as an expense category. On slide seven on our growth strategy. Our growth strategy really is unchanged, but it's important that we set it out here together with our cost management strategy. Our growth strategy can be divided into organic growth, acquisitional growth, and outsource growth. We are continuing to focus on organic revenue growth as we have done since the beginning of Sonic. It's been a major and core strategy of the company to build a company that is able to deliver outstanding services and grow organically.
Our organic growth is assisted by growing markets under the forces of drivers such as aging, new tests, et cetera. There's also the catch-up testing that we're seeing in selected areas of our businesses. It's important to say that our culture, which has been established for a long time, itself drives market share. What we're seeing right now is a dominance in the specialist and hospital referrer sub-markets. This is a very important point, and I won't spend too much time describing how this has happened over a long period of time, but we are now very strong in those higher end, higher value sub-markets of our businesses in both pathology and radiology.
We also are strong in genetic testing, and in fact, genetic testing is probably the strongest growing sub-sector of our lab business at the moment. We're seeing growth in prenatal testing and a range of other testing. Testing for cancers, testing for Carriers, in pregnancy, et cetera. That is coupled with some of the selected tests that we have licensing for, such as ThyroSeq, Oncotype DX, and also microbiome testing. As far as acquisitions go, like organic growth, acquisitional growth has been a core strategy of the company for a long time, and we're very set on taking that a whole lot further, particularly with our strong balance sheet. What we're seeing is M&A activity increasing since the pandemic is waning.
We are in the process of taking advantage of some of that. At the moment, we are currently progressing several acquisition opportunities, and our pipeline remains pretty rich. Another source of growth for us is contract growth, and we're currently pursuing several contract opportunities, including a large one in the UK. The capital management slide eight, is there really to outline the strength of our balance sheet. If you have a look at the table first up, you'll see that our gearing is at historic lows at around 10%. Our debt cover is at historic lows, currently sitting at about 0.5 times. You'll also see that our net debt has actually increased a little, AUD 90 million, and that's largely due to currency exchange movements.
We've completed AUD 425 million of the maximum AUD 500 million of our on-market share buyback. Our headroom is currently AUD 1.5 billion. We are very well positioned to fund accretive acquisitions and other growth opportunities going forward. On slide nine is our traditional revenue split in the pie chart. There's not a big change from the last time we presented this. Remember that this is in statutory Australian dollars. There is currency movement in this, although it's not very significant in this half. From an Aussie dollar perspective, there was a little bit of tailwind against the U.S. The Aussie was weaker against the U.S. comparatively. Headwind against the euro and British pound.
Switzerland, there was a little bit of tailwind. A feature of this pie chart is our radiology division, which is now taking up 10% of our total revenue. The radiology division is performing exceptionally well. Strong division. We were sitting at about 7% for the radiology division at the full year result. There is a little bit of acquisition in that, organic revenue growth is strong in that business, bringing it up to 10% of our total revenue. We'll move through the country slides just quickly. First of all, the USA, where our base business organic growth versus last year was 6%. COVID revenue down 78%.
From an operational point of view, the good news was the PAMA Medicare fee cuts, that's Protecting Access to Medicare Act, have been postponed again. They were to have an impact of around $15 million on our revenue per annum. There is now legislation still on the table. That's the SALSA Act, Saving Access to Laboratory Services Act. That act is designed to delay and reduce the cuts, and we're hopeful that it will be successful. Our industry association in the U.S. is working hard, and we are very involved with that to ensure that that act actually is enacted so that the cuts can actually be redefined or delayed. I mentioned ThyroSeq, and it is worth singling out. It's a single test.
It's a thyroid cancer classifier test that we have exclusive licensing to. It's performing outstandingly. The revenue growth of this particular test is more than 25%, and we're now at a run rate revenue of about AUD 55 million per annum. We're also, from an operational point of view, working to integrate our growing anatomical and clinical pathology operations to achieve cross-sell and synergy opportunities. Moving on to Australian pathology, our base business organic growth was 8% against last year. COVID revenue down 76%. You'll see most of our countries are in that order when you compare the half to the last year's half, you know, in the order of around 70%, 80%, something like that.
From an operational point of view, good news was that the COVID PCR test fee, as set out by Medicare, has been extended until the end of this calendar year. Our national aged care COVID PCR contract has been extended until at least 30th of April 2023. This is an important contract because it is that demographic, aged care centers, where COVID is still a problem. The National Cervical Cancer Screening Program has now begun its second five year period, and it's at this point that testing is done for a second time. We're seeing a great increase in cervical HPV testing as part of the screening program, and we expect that to continue through the year and into next financial year as well. I mentioned that we are experiencing strong growth in genetic testing.
In Australia, in particular, we are very pleased to have very strong positions in the specialist referral and hospital referral markets. We've also taken a good look at our market share gains, which is not easy to calculate, but if you look at your item numbers or episodes or dollars, just Medicare versus the total Medicare markets, and we've done that over the last 10 years, Sonic's market share gains have been achieved every single year of those 10, an outstanding result for this particular division. Moving on to slide 12, which is Germany. Base business organic growth, 5%, and in this case, COVID revenue down only 54%.
You'll see that there is a fluctuation between countries, and in Germany, there is still higher residual COVID testing, even though we're not sure how this will pan out going forward in any country. From an operational point of view, we're in the process of building three new lab buildings in Hamburg, Munich, and Limburg. These labs, new labs, are there not only to keep our operations at ultra-modern world-best standard, but what we have found is that with new labs, we achieve efficiency in our operating businesses. Our anatomical pathology division is growing strongly in Germany, and we're working on getting synergies between our clinical and anatomical divisions in that country too.
Just like ThyroSeq, we have a license, an exclusive license to offer the Oncotype DX breast cancer genetic test. That is also performing pretty strongly in Germany. We are the exclusive provider in Germany and the only lab offering that test in Europe. Moving on to Switzerland. We had a fee cut in Switzerland from 1 August 2022, with an impact on our Swiss revenues of approximately 7% per annum. However, when we look at H1 base business growth, it is flat, which is an outstanding result in the face of that fee cut, reflecting strong volume growth, which has offset the fee cut. COVID revenue is down 71% in our Swiss operations.
Just from an operational point of view, our very high-quality services are driving market share gains, and you can see that by the flat revenue growth in the face of the fee cut. We also achieved a successful CEO succession in our large lab in Zurich, where Dr. Willy Conrad, a pathologist, replaced Dr. Franz Kaeppeli, who is a founder who unfortunately passed away unexpectedly last year. Moving on to UK, where our base business organic growth was 5% versus last year. We're experiencing strong growth in our private and NHS businesses, including and especially coming from a private GP market. There seems to be a structural change taking place in the UK where private general practice referrals are increasing quite dramatically.
We're in that space and set to offer services in that space, and this is an area that we will keep a close eye on as this change takes hold, which I believe it will. Our COVID revenues are down 77% in the U.K. Excuse me. From an operational point of view, we've been awarded a preferred bidder status for a large 15 year NHS laboratory contract, that's Hertfordshire and West Essex, and we're in the process of final contract documentation right now. We're also bidding on two additional smaller NHS lab contracts in North Central London. Moving on to Belgium. Our base business organic growth was 11% and COVID revenue down 88%.
Unlike the Swiss situation, good news was, we received a fee increase in Belgium, or the lab industry actually, got a fee increase of 6% linked to inflation. That commenced 1 January 2023. We also achieved a successful CEO succession in Belgium, where Astrid Coppens, a senior laboratory scientist, has replaced Gerd Salembier, a founder who retired last year. Now Radiology Division, which is slide 16. Now remember there is no COVID revenue in this, so it's a clean-ish result. Revenue growth 10%, that does include a little bit of acquisition from the Canberra Imaging Group. Organic revenue growth 8%. EBITDA growth 12% with margin expansion of 50 basis points. An outstanding result with margin expansion. Excellent.
From an operational point of view, we are continuing to see growth in the higher value modalities such as CT, MRI, and PET scans. We are well-placed to take advantage of those through our four radiology divisions in Australia. We've also received full Medicare funding at six additional MRI sites, and that happened through the period, and we've commissioned two additional PET/CT scanners in the period as well. In addition to all of this, we've now implemented AI for chest x-ray into all our radiology centers with brain CT AI tool to follow. I'll just mention a little bit more about this in two slides' time.
Sonic Clinical Services, which is slide 17, revenue is down 13%, and that's mainly due to the cessation of COVID-related services, mainly vaccination services, which we provided so well in the previous period. The decline in earnings are reflective of the lower revenue. The primary care market is challenging at the moment. However, the level of GP private billing in Australia is increasing to mitigate the challenges in terms of GP numbers and referrals. Our occupational health division is recovering and will be bolstered by a new defense contract that we've won, which will commence in FY 2024.
On slide 18, we wanted to just say a little bit about our artificial intelligence. I might start off with the second major bullet point, which is Harrison.ai, which is the parent company, in which Sonic took a 20% strategic stake in H1 FY 2022. Harrison had an existing joint venture called annalise.ai for radiology. That's the chest x-ray product that we've now implemented throughout Sonic Radiology. This is a world-beating chest x-ray AI tool which can detect 124 abnormalities. Our plan is, or the plan of annalise.ai is, to sell the product worldwide. It currently has approval in 35 countries, with more to come. The brain CT product has now been launched following the chest x-ray product.
It detects 130 findings, and it currently has regulatory approval in eight countries, and chest CT and other modalities will follow. On the top major bullet point, Harrison and Sonic have combined to form a joint venture called franklin.ai, and that joint venture is designed to develop best-in-class AI tools for pathology, as opposed to the annalise.ai product in radiology. Since we formed the joint venture, there's been a huge amount of activity, and it's been very exciting to be part of this, where the team has expanded in areas like engineering, product development, et cetera.
Within Sonic and around the traps globally, we are digitizing literally hundreds of thousands of histopathology slides and having them annotated as well, and rushing forward to achieve milestones with the hope of releasing our first product within the next 18 months. Very exciting. The plan is not just to use the histopathology tools within Sonic, but to sell them globally. One of the incredible things to see is the synergy that's being created between the two parties in the joint venture. Sonic from the medical side, with deep, deep expertise in pathology and histopathology, and Franklin on the other side with deep experience in AI technology, and all kinds of smarts that, you know, we don't have. This is real synergy in action.
On slide 19, just a quick mention of our strategic partnership with Microba. We've already announced this, that Sonic took a 20% stake in Microba Life Sciences to deliver Microba's microbiome testing services within Sonic's global markets. Microbiome testing is a rapidly growing field. It uses genetic sequencing to analyze microorganisms in various parts of the body, but particularly in the gut or the colon. We expect the demand for microbiome testing to increase into the future.
Sonic is now very well-placed with an outstanding partner to capitalize on this potentially burgeoning field of pathology going forward. The last slide in the pack, I won't go through the details on the slide, but just to say that our 2022 sustainability report was released in November last year, and it sets out the company's sustainability governance structure, our key goals, including our net zero strategy and our key achievements to date. We continue to progress our sustainability initiatives across our operations. If I could just end the formal part of this presentation just with a short summary to say that over the last two to three years, Sonic has played a vital role in the pandemic with basically two major outcomes from that.
Firstly, we made a massive contribution to the pandemic through our testing and vaccination services, which really served to enhance our global reputation as a leading healthcare company. I do wanna take the opportunity here to acknowledge Sonic's doctors, managers, and staff throughout the world for absolutely incredible work, delivered under very difficult conditions. I can't say anything less than this was a Herculean effect, of which we are all very, very proud. The second pandemic outcome is a financial one, that we emerge with a greatly strengthened balance sheet ready to fund synergistic acquisitions for company growth and at the same time not being exposed to rising interest rates.
As COVID revenues reduce, it's a real positive sign to see the return of strong growth in our underlying base business revenues, particularly in the latter half of H1 and then into January and February. As an example, I've mentioned the number in our Australian pathology division, we're seeing very strong organic growth in January 2023 versus the equivalent pre-pandemic month, January 2020. In our whole laboratory division, which is more than 80% of our revenue, we now have strong base business growth, plus the addition of a new test. That's the COVID PCR test, which even in lower volumes, excuse me, is gonna add to what we can call our new base business into the future.
The last point that I'd like to make is that over the long term, and I'm talking here decades, we have been almost obsessive about the importance of culture as a means to build a high quality and world-leading healthcare company. Our medical leadership culture has served to enhance quality and service levels in the company, and also importantly, to attract the best pathologists, radiologists, other doctors, managers, scientists, technicians, and others, making up our staff of now 41,000 people worldwide. As we emerge from the pandemic, all of this comes together, and we find ourselves back in a strong business growth mode, taking market share in markets that are expanding themselves and holding a dominant position in the high value specialist and hospital referer submarkets in both pathology and radiology.
Finally, to add to this, M&A activity has now returned post-pan-pandemic, and our excellent reputation and strong balance sheet put us in good shape to really bolster our organic growth via acquisitions and contract wins. I'm gonna hand you back to our coordinator. Thank you very much for that, to take your questions. Thank you.
Thank you. Your first question comes from David Low with JP Morgan.
Thanks very much for taking my question. Just wanted to start with the pricing environment. We, we see from your U.S. peers that they talk about their average price per requisition. I was just wondering, given you've talked about the genetic testing and other newer services, whether you could talk to what's happening with your average price and then perhaps expand that to indexation and whether you're expecting, you know, price increases to match inflation as we saw in Belgium in any other regions, please.
Yep. We can all have a shot at this. I'll start. What we have seen. I mean, you've actually outlined exactly what's happened. Average fee or price per accession, as we call it in the U.S., has increased fairly substantially over the course of the pandemic. If you take out the COVID test, which obviously has an impact on our average fee, it has still increased significantly. Now, whether this is solely due to the shift towards higher end tests and modalities, or whether it's that plus a reduction in the lower value episodes, we're not quite sure yet. The bottom line is, and we saw this happening through the pandemic, the average fee has gone up in almost all of our countries.
Yeah, maybe, David, it's Chris here, just to add a little bit more to the kind of second part of your question. You know, it was great to get the indexation in Belgium. In the UK, whilst it's a relatively small market, in terms of Sonic's broader business, but we have CPI indexation in most of our contracts, our NHS contracts, and we also obviously have some pricing power in the private market as well. In some ways, inflation might be our friend in that market. In other markets like Australia, it remains to be seen whether or not there's any scope for indexation of the fees as such. We, as Colin said, we have benefited a fair bit by index, by the enrichment, if you like.
Our average PPA, price per accession, is going up, and that's particularly true in the specialist part of our business, which we dominate. It remains to be seen what happens with PAMA in the U.S., and I think we're starting to see some opportunity to maybe increase fees in the private sector in the U.S. It'll be interesting to see how that pans out. We're hearing also from Quest and Labcorp that they're getting some positive outcomes with negotiations of fees with the private insurers. Maybe I'll leave it at that, unless...
That's it.
Yep.
All I would ask is that you might put a number out there on what's happening. I mean, you've set it up.
Yeah, look, it is pretty hard to put a number on, Dave, 'cause it's very different in every, in every geography, but it, it will flow through to that revenue growth number. I guess that's why we gave you the January number, which is actually pretty strong, particularly here in Australia, as Colin mentioned.
I might just press a little further. I mean, CPI is mid-single digit. I mean, what are we talking about with average price? Is it low single digit? High single digit? Any sort of sense you could give us, please?
Look, I don't have a number across the group. We haven't announced it. I don't think we can really give you that. But look, as you know, inflation's varying across the world, but in the U.K. right now, it's double digits. You know, I believe that will flow through into our contracts in that market. That gives you one little example of what's happening there.
All right. One other topic. M&A, I mean, we've heard fairly similar commentary than what we've heard for many years now and understand that it's part of Sonic business model. Can I get you to talk a little bit to what the pricing environment or competitive environment is like in the M&A space? I did note that SYNLAB has stepped back on their plans, and just wondering whether that's indicative or whether you're seeing that, a degree of reduced competition for assets as we sort of move into a more difficult economic environment, please.
David, I think what we can say is that there hasn't been any escalation of multiples or in valuations. As we've said before, some deals are done in a non-competitive process, in which case the valuations will be more favorable for us. But we're not noticing a big difference in the metrics as we move forward. We are looking at a number of near-term opportunities at the moment.
David, maybe one other thing to add to that is that during COVID, whilst there were opportunities we looked at, it was challenging because of the COVID and expectation about value because of that, and how do you value that going forward. With a bit more visibility on where we think COVID is heading, and, you know, appropriate earn-out type structures, I think M&A becomes a little easier going forward.
Great. Thank you very much for answering the questions.
Your next question comes from Andrew Goodsall with MST Marquee.
Good morning, and thanks very much for taking my questions. The first one, just want to look at the EBITA. The constant currency in reported numbers are flat. I would have expected with a bit of tailwind, FX tailwind, that might have been a little bit up. Just trying to understand whether that is a good reflection of where your offshore costs and mix might be, or maybe a bit of COVID playing into that as well.
Well, do you wanna take that one?
I guess one of the things about our geographic expansion, Andrew, is that we're exposed to a number of different exchange rates, and there's sort of a hedging, you know, component kind of built in that. Whilst the US dollar went one direction in the period, the euro very much went the other, as did the pound, as I think Colin touched on earlier. The net exchange rate impact was very small in the period. It's not really about any significant change in cost versus one market versus another. It's purely the offsetting impacts at the different rates.
I think it was actually only about AUD 40 million of the revenue line, which, you know, when you consider our revenues is nominal.
Yeah, got it. More around perhaps, yeah, movement. My next question, just back of envelope, when I back solve your Australian pathology business versus pre-pandemic, as you say, you seem to have recovered to where you should be at, say, a 5% CAGR off that base. When we look at the market data, that hasn't recovered. I guess you've talked about perhaps gaining some share and particularly, specialist recovery. Is that? Yeah, just any more color you can sort of add on what you're achieving versus, say, peers.
Andrew, it's what I touched on, and obviously we can't give out numbers, but we have done extensive work, looking at our market share, as a percentage of the whole Medicare market. Sonic, in Australia, and it applies to each of our divisions in every state, grows progressively each year over a, almost 10 years. We continue to take market share and therefore, looking at just the bare Medicare numbers will not reflect how Sonic is performing. You know, we are continuing to take market share. There's no evidence to suggest any change. I think a big part of that is our very strong position nationally in the specialists and hospital referral market, because, with, you know, slightly lower GP numbers, the referrals from GPs are affected, whereas specialists are now back at full capacity and hospitals are busy again as well. We are benefiting from that.
Okay. That percentage share of specialists which you're much more dominant in, is probably giving you the more of a tailwind perhaps.
Absolutely.
Others that don't have that exposure.
Exactly right.
Yeah.
Just to add to that.
Thank you very much.
Just one more point. Remember that here in Australia, which is what you've asked about, the GP market is additionally burdensome because of all the collection centers that we have and the rents applicable to them, which does not apply in the specialist market.
Okay. Yeah. That's the margin flow from there.
Correct.
Okay.
Correct.
No, that's great. Thank you very much for that.
Thank you.
Your next question comes from Lyanne Harrison with Bank of America.
Good morning. I might just follow on from Andrew Goodsall questions there, but focusing on the imaging business. 8% organic growth is better than the Medicare data suggests. Can you provide some color in on that and where that growth is coming from?
Paul's gonna take that.
Radiology in particular, the growth over the last two years has been very different in different states at different times because of COVID related lockdowns, etc. Mix of business and as in location of your business, does come into play there to some extent. To some extent, the 8% just reflects the comparative. However, as Colin's pointed out as well, we have been growing strongly in that division. We have been focusing on the higher end modalities and achieving growth through that. We probably have also been gaining some market share in that market as well. It's difficult because of that, the distortions that the COVID period have caused.
Thank you. In terms of, Can you provide some color, I guess? You mentioned the cross-sell opportunity between anatomical and clinical testing, both in the United States and Germany. I know you can't provide any numbers around that, but can you provide some color, about how we should be thinking about that cross-sell opportunity and the timing as well?
It's gonna be difficult to put numbers on this, but what our objective is to use our customer base as efficiently as possible. If we have a clinician referring us anatomical pathology, we would like to access that clinician's clinical pathology and the converse as well. Now, this is not just theory. It is quite possible, given that you have a relationship with a clinician, you have couriers going there, you have connections. What we're doing in the U.S., for example, it's actually a very, we've got a great example of that. Our recently acquired ProPath business in Dallas began its life as an anatomical pathology division company and got bigger and bigger.
In the more recent past, decided to add clinical pathology to its menu because of all the connections and relationships it held with clinicians. It's been very successful. They've built a fairly large clinical pathology lab together with an anatomical pathology lab like we have here in Australia. Remember that in the U.S. and in Germany, the evolution of pathology has been different from Australia, where the two, anatomical and clinical pathology, have been quite distinct and separate. They're not consolidated into single labs as they are here in Australia, and this has something to do with training of pathologists.
it's just very interesting that we have now a great example in ProPath to guide us in the U.S. as to how we can achieve similar outcomes with our clinical pathology labs, and given that we have a lot of anatomical pathology as well, this should be quite possible. A similar thing happens in Germany, where the two disciplines have been quite separate, and there's an opportunity, if not to bring them together physically, to at least capitalize on the relationships that the respective sub-disciplines have.
Thank you very much.
Sorry if I can't give you any numbers, but this is gonna be caught up in the growth of each of those two sub-disciplines going forward. It would be very difficult to give you a number.
Understand. Thank you so much.
Thanks.
Your next question comes from Gretel Janu with Credit Suisse.
Thanks very much. Good morning, all. Just in terms of the outlook into the second half, the 22.5% EBITDA margin that you achieved in the first half, can we now assume that that's the base, then we would expect improvement to come to margins in the second half? Thanks.
Yeah, look, it's a good question. There's probably going to be some reduction in that margin because some of that is driven by the COVID volumes, which were AUD 390 million, I think, in the first half, and will probably be something less than that in the second half, as indicated, even the January number at AUD 32. That will have a bit of a negative effect on margins in the second half, I suspect. At the same time, as Colin said, we're working on costs, and we alluded to the fact that we think that, you know, our base business margins are pretty much in line as best we can calculate with what they were pre-pandemic. It wouldn't surprise me if they're down a little bit in the second half, depending on what happens with that COVID volume, but hopefully not anything material.
Understood. Then just in terms of, the reduction in consumable costs you called out, are you able to split what's actually happened from the base business costs as opposed to the COVID consumable costs there? What kind of quantum of procurement savings you're achieving?
Look, the procurement effort is still in full swing, There is a little bit of pressure from some suppliers with inflation coming through, We've been able to resist that, partly 'cause we have contracts, partly 'cause we're a big customer and we can use that buying power. We're also running, continuing to run RFPs. We've just completed one in Germany which saw a more than double-digit saving. I think we're pretty comfortable that we'll see a continued reduction because the COVID cost was, in percentage terms, a little higher than our average cost. As COVID comes down, I think you'll see the percentage continue to come down. We're pretty comfortable for the foreseeable future that we won't see any actual increases in prices for the items we buy in our procurement efforts.
Understood. Thanks very much.
Okay.
Your next question comes from Sean Laaman with Morgan Stanley.
Good morning, Colin and Chris. Hope you're both well. It seems that Sonic's a bit of an outlier from the health service companies that we look at. You've been able to deliver, you know, good cost containment in an inflationary environment. Just wondering, you know, what confidence or what could you tell investors, you know, looking forward over the next sort of 12 to 24 months, that at some point we might not see a cost up with inflation and jumping up with inflation and we can see, you know, continued delivery of the margins that you described?
Maybe the major category you're talking here is labor, and, you know, we're very mindful of what's going on around the world with inflation levels. In general, that salary cost increases have been contained to around 5% or less, even in this environment. You know, we're not expecting it to get much worse. I mean, one can never tell, obviously, but I think that's our position at the moment. Given that would be a little higher than what we would normally have. You know, we're using all kinds of means to mitigate any potential increases in that particular number.
We can take a lot of time over our headcount, and I mentioned in particular, you know, casuals, contractors, overtime, et cetera, in the post-COVID world. In a range of other cost categories also, we're constantly looking to find efficiencies. We're very conscious of the point that you're raising, and we certainly will not want any cost category to get away with itself and affect our margins. That's all, I guess, as much as I could say at the moment. Unless Chris and Paul, you wanna add something?
I guess maybe just to add that obviously there's ways of managing our labor costs through technology that we're working on digitization and histopathology. There's all sorts of things that technology is our friend in a lot of ways in terms of managing costs. As Colin said, look, we can't be sure what's happening with inflation. If we could, would be nice, we're just trying to do our best in this environment, and so far, so good.
Great. I might try and ask this next question clearly, so sorry if it sounds a little jumbled, but, you know, ThyroSeq, you've given us an exit rate of $55 million, which is pretty impressive. You know, I'm thinking, you know, is that a U.S. only exclusive licensing, or is there opportunity to take it global, if not already? You mentioned Oncotype DX. I think you mentioned that's a German label or license, sorry. Is it opportunity to do the inverse with that one and perhaps take it to the U.S., if not already?
Could that be of similar magnitude to what you're seeing with ThyroSeq, just looking at the stats of the various tests required? Thinking if you are, I guess of an innovator that's come up with a new type of, genetic or diagnostic type test, and I'm looking to maximize the distribution and, market approach of such a test. I'd kind of think of Sonic as having, you know, the broadest global presence of, you know, pathology or, you know, laboratory testing, facilities in the world. Is that a strategic advantage for your company as, you know, an appealing place in which to market your test? Is there a pipeline coming for you?
Okay. To take the two tests one by one. In terms of ThyroSeq, we can take the test to countries other than the US, but the problem there is the funding of the test. We are already offering that test here in Australia, for example, but it's a very expensive test which is fully covered by insurance companies in the US. Therefore, it's a test that is being ordered by relevant clinicians. Here in Australia, it's not covered by Medicare, obviously, and it's a patient-paid test, and you're talking here AUD a few thousand dollars per test. The same thing would apply in other countries around the world. The penetration would be low because there's a price resistance, simple as that.
Now, that might change, going forward because this is a very useful test which actually saves healthcare systems significant dollars. Just to put it very quickly, the ThyroSeq test allows a clinician, an oncologist, to decide whether somebody with a thyroid cancer, early cancer, should have surgery or not have surgery. The not have surgery decision saves $ tens of thousands in delaying or averting an operation. It's a cost-effective test now, and therefore, other healthcare systems might fund the test in their best interest. In terms of Oncotype DX, our license, cannot extend to the U.S. The test is already being offered by somebody else in the U.S. The test originated in the U.S.
It's Exact Sciences and so our license is for Germany and Europe at the moment and no further. Now, your point you make about Sonic being in a position to offer tests such as these is exactly our plan for microbiome testing. Our partnership with Microba is intended to achieve that, where we can roll the test out in multiple countries around the world, in addition to wherever else Microba wish to offer the test as well. Going into the future, yes, I think there will be more tests like this where we can achieve a licensing agreement and begin to roll the test out in multiple countries, not just one country. They won't be like ThyroSeq, which is an extremely expensive test.
Microbiome testing, whilst it's not cheap, is affordable, and we see that in our microbiome lab in Germany, that's in Limburg, where it's largely patient pay for the test that we offer there, and it's a very successful operation offering a microbiome test that is not quite the same as what Microba offers.
Thank you, Colin. Very full answer. Appreciate it.
Your next question comes from Mathieu Chevrier with Citi.
Good morning. Thank you for taking my question. Sorry, just to go back on the Australian growth number, of +16% versus January 2020, that's about a 5% CAGR. Are you confirming that the growth there is really driven by your specialist work rather than, you know, the more broad, you know, for the lack of a better word, community work?
Yep. I don't wanna give the impression that we are not growing in the GP market as well. I think I can say unequivocally that we are extraordinarily strong versus our competition in the specialist and hospital markets. We hold a big piece of the GP market, which has become very competitive, you know, with the collection centers and the rents that are paid for collection centers. We stand quite apart in that high-end specialist and hospital market. That's really a function, that's what I was trying to say at the end, of really decades of development of a culture that attracts the top pathologists, top managers, top scientists, where you can expand your menu and offer very high-end, super specialized services, because those are the services that specialists and hospitals require.
This is something that will continue into the future, and it's not just in Australia. The same thing can be said in Germany, for example. Although the competition is perhaps a bit closer in Germany. Here in Australia, because you asked about Australia, we separate ourselves out in that respect. I can point to probably two or three decades of strong culture under the medical leadership model to get us to this position where it's very, very difficult to catch up or copy.
Yeah. Understood. Then do you expect the growth to accelerate from here, or do you think that the backlog of patients has largely been worked through at this stage?
No, I think it's only beginning. By the way, the catch-up testing doesn't apply to all areas of pathology testing. We're seeing, for example, in histopathology, anatomical pathology, what appears to be a very significant catch-up of operations, procedures that were not done during the COVID period. You know, this ranges from significant operations like breast lumps, thyroid lumps, down to colonoscopies, where biopsies are done, in skin cancer clinics, where skin lesions are taken off. There, there's what appears to be a definite catch-up phenomenon, which has only just begun. We anticipate that this could run for a good 12 to 18 months.
There has been something written about this where, you know, surgeons and hospitals are saying that in order to catch up from lost procedures, during COVID might take, one to two years, is what I've read. That's not to say that we're gonna continue at 16% growth for two years, probably won't. I think the trend has now established that, it's an upward trend of growth in our Australian pathology division, and it's probably gonna stay up, for quite a bit, quite several months, if not, more than a year.
That's great. Thanks very much, Colin.
Your next question comes from Craig Wong-Pan with Royal Bank of Canada.
Great. Thank you. Just wanted to touch on the near-term acquisition opportunities. I know you can't sort of pinpoint particulars, but just should we think of these as kinda small bolt-ons, or could they be sort of more sizable, being large or medium-sized acquisitions?
I think, dude, Chris will answer this one.
Thanks, Colin. To dig, obviously, Craig, we can't give you any detail, but look, the pipeline is probably stronger than it's been for a number of years, you know, understandably, I guess, during COVID when things were a bit tougher to do M&A. Yeah, look, I don't We haven't announced anything other than what we've put in the paper today, but they're not tiny.
Okay. Sure.
I'll say that.
Yep. Okay. No, that's helpful. Just in the U.S., the change to the CMS reimbursement for collections or for draws, just wondering how much revenue that might provide you?
Paul?
Look, we haven't quantified that anywhere publicly, but I think some of our U.S. competitors have. If you look at what they have said and apply our market share versus theirs, you'll come out somewhere near it. It's certainly a positive for us. Yeah, I don't have that number to hand.
Okay. Okay. Just wanted to touch on, so Harrison and Franklin AI. Were there any significant costs that you were incurring to, as part of that joint venture, that were in this period that might not repeat going forward? Is there any kind of large share of losses for Harrison that's in the, that's within your first half 2023 numbers that we should look to normalize going forward?
We do equity account for the Franklin joint venture, we have booked a small loss in the half year period. That'll probably, Craig, continue ongoing until we start to get to profitability. It's not hugely material. I don't know, it's a few million dollars probably. It's not material in the scheme of things. We, you know, we remain, as Colin said, we're excited with what the potential of that business could be, and that we, you know, we might be starting to get first revenues within the 18 month kind of period, which is quite exciting. We probably will be able to leverage off the sister company, Annalise, in some way.
you know, annalise.ai is getting some pretty good traction with their product and some of the offshore parties who are starting to use that and enjoy it are saying, "When's your pathology product coming?" There's probably a bit of a nice symbiotic relationship between those two offerings.
Great. Thanks. Just my last question on Germany with the new labs there, I wasn't really sure, are you building new labs and then moving your existing lab work to those, or is this like additional labs, so you're expanding your footprint?
No, these are new labs to house existing labs, but it'll involve mergers of two or three labs into one building, in both situations. There's a number of permutations in different locations. The Limburg lab is a new lab for a very successful business. That's our microbiome business. In both Munich and Hamburg, we're talking about merging multiple labs into a single new facility.
We're talking about labs we didn't mention specifically, but I think we might have mentioned previously, we're also working halfway through a major expansion of our lab in Brisbane, in Bowen Hills. Those labs in the Germany and the Bowen Hills explain some of the increase in property CapEx that you'll see in the cash flow.
Okay. Then just to follow up, sorry to that point, around the lab expansion in Brisbane and new labs. Could you provide any expectations for CapEx?
Look, probably not because we've got so many things happening. They're all happening at different times. I think for the Brisbane project, it's an AUD 70 million project. It will be largely finished by the end of this year. I think other than Munich, the others will probably be largely finished by the end of this year as well. I suspect for going forward, there aren't any major building projects I'm aware of for FY 2024, so we probably should see that number drop down a bit, the CapEx number. Chris, with the contract in the U.K.
Yeah. Once that's signed, there is a significant building project. I suspect the actual-
Might be later.
Might be in, might be more in FY 2025, yeah.
Yeah.
Okay, great. Thank you.
Your next question comes from Saul Hadassin with Barrenjoey Capital.
Morning, guys. Just the first one, just that comment about base business margins being in line with pre-pandemic levels. Is that a reference to the group level margin? Or is that focusing more on the pathology division? What assumption have you made regarding PCR margins to arrive at that conclusion?
Colin?
Clearly it's not a precise science, Saul, because as we've explained before, you know, the reality is the COVID business is mixed into our labs with all of our other work. To answer your first question, it is at the group level that we've looked at that. All we can really say is it's not a precise science. It's our best estimate, if you like, of what the COVID and base business margins were in that period. You know, that's why we've used sort of terminology like in line with, because it's impossible to be precise in looking at that split.
It's now getting a bit more complicated because the COVID test is now finding its way into panels and the like. That's makes that kind of calculation even a little more complicated. As Colin said before too long, this will be just part of our base business, but it's probably a net positive part of our base business.
Yeah, fair enough. Just on the outlook, you've got January base business growth across all regions. Now you've got a month's worth of PCR revenues across all regions. Just wondering why you're not in a position to provide more quantitative guidance regarding FY 2023 earnings?
Look, we tossed it around, but on balance, it is still moving around a bit. I'm sure we'll probably be thinking more about that when it comes to FY 2024. I'm sure things will probably stabilize to a point where that would make a whole lot more sense. I think we decided at this point that we wouldn't look at that for the second half.
Okay. That's all I have. Thanks.
Thanks.
Your next question comes from David Stanton with Jefferies.
Good morning, team, and thanks very much for taking my questions. Just following up then on the previous question there. You know, we understand you can't give earnings guidance, but you know, do you think that January revenue growth rate is sustainable through the second half, please?
Just remember, David, that that applies to one division of Sonic.
Mm-hmm.
we've given you a rough idea of, the whole end, the whole group. It varies by country, and we're following it closely. You know, there's nobody can predict what's happening, but it really does look like base business is coming back stronger than historically, definitely in the Australian pathology division. We're also seeing it in other markets. Like for example, the U.K. market is particularly strong as well. There's different reasons in the U.K. for it. It's slightly below average in the U.S. and slightly stronger in Germany. We're strong in Switzerland. It's very difficult to actually predict each market. We think it's gonna remain strong for the next several months.
Understood. Thank you. Then, can you sort of explain the consumable cost decline journey that you've been undertaking in terms of these new contracts? I mean, how many countries have you done? How many do you have to go? I guess, are you looking for sort of a global contract and anything around the scale of decline per contract? You've mentioned one at double digit decline. Is that the way we should be thinking as these get rolled out further, please?
Yeah, David, we run a, what we call a center-led procurement effort. We've got a team here that plays a role in Australia, obviously, because we're here, but we also play a role overseeing what's happening in the other markets. In each country, we've got a procurement team who are running their own RSPs, but we all work together. When it makes sense to look at a global contract, we do, and that happens on occasions. It's not something that we run out of head office because there's too many complications to that. And this has worked very, very well for us.
We find when we run RFPs, like I mentioned double digit was actually closer to 30%, that when we run RFPs and because we're a significant player in all of our markets, that the vendors have to take the attitude, well, either we win this and we'll have this business for the next five to seven years, or we lose the business and we don't have that business for five to seven years. So that puts a fair bit of pressure on the suppliers with pricing. I guess they put pressure likewise on their own supply chains because it surprises me from time to time just how we can achieve those sort of changes. There's also changes in technology which help them as well.
You know, obviously, we're also in the face of some inflation pressures too. I guess our strategy would hopefully be that we can, with those RFPs, we can offset any inflationary pressures that we may not have so much control over in the consumable space. Maybe with a bit of luck, it might be a net saving as well. But there's so many different platforms in different countries, it's hard to be kind of specific.
Just as a follow-up to that then, is it, you know, Germany's about 30% of your pathology business?
Yeah.
You sound like you're close to done Germany. Is it fair to say that, you know?
I know it's,
therefore you are 30%.
There's not, There's no done here, Dave. It's a bit like painting the Sydney Harbor Bridge. You get to one end.
Sure
Then you start again.
Yep.
With technology developments, those, you know, it surprises us. You know, you run an RFP for a platform, and you get a, call it 25%, 30% reduction, and then five years later you do it again and you get a similar reduction, and you think, "Where can this end?" It's kind of the way it works.
Understood. While, while you're running hot, Chris, just, two questions from me, more around depreciation for the second half compared to the first half. Tax rate was a little higher than I'd expected in the first half. Can you sort of give us an idea of what you should, we should be thinking for the full year potentially, please?
Paul, do you wanna run with that one?
Depreciation, I mean, I think the level of the first half's a pretty good guide to the second half. We are, as touched on, working on some building projects, et cetera, it might be a little higher in the second half, but not materially. In terms of the tax rate, it's always hard to predict because it depends on the profitability in each market in the particular period, as well as other factors as well. You know, somewhere between sort of 26.5% to that 27% level is roughly where we would expect it to be. It was obviously at the higher end of that in this particular period.
Great. Thank you very much.
Thanks, Dave.
Your next question comes from Steve Wheen with Jarden.
Good morning. Sorry to keep asking questions. I just wanted to touch on the Australian business again, just with that dominance in the hospital and specialist channel. Sort of three parts to that. Is there some part of that strength recent contract wins within hospitals? Also just interested in whether or not you've been able to take price through co-payments within that channel and if so, how much? Whether now you're in a position to be a bit more, say judicious with your collection centers and perhaps move away from some of the less profitable ones because you've got the flexibility within the hospital and specialist channel.
Steve, just to go through these, no, it's got nothing to do with contracts. just to, I'm very keen to make this point that the referrals we get from specialists in the outpatient market, they increase progressively over a long period of time based on the standard of service and super specialization that a lab has. In our case, we have spent energy and dollars, based on a medical leadership culture to build a huge team of outstanding people. This is pathologists, scientists, managers, to build departments that can actually cater for that high-end work. This is the real heart and soul of medical leadership. What it's done is it's put Sonic in a position now where we are, the specialist's friend.
We can service them in a way that many of our competitors are not able to do. It's not contracts. In fact, if there are contracts that some of our competitor labs hold, I think it would be worth checking, you know, because those you don't necessarily hold forever. We're not in that position at all. Your second question was, are we able to achieve gap funding or patient pay? The answer is essentially no. The vast majority of the specialist referral and hospital referral work comes at no gap to the patient.
In the hospital setting, there might be one or two exceptions, but the vast majority, we have negotiated outcomes with insurance companies whereby there is no gap to the patient. In the outpatient market, most of the work is bulk billed. There will be a small proportion that is privately billed, particularly if the test is not covered on the Medicare schedule, then it will be privately billed. That hasn't changed much over the years. That's not the reason why we have grown to a dominant position in that market. The third question related to collection centers. You know, we do what you said is absolutely logical that the cost of servicing GP medical centers and particularly the collection center rents is a burden.
However, we are, we try and manage that cost as best we can. We try not to get into arrangements whereby we're in a losing position. We don't just open up collection centers willy-nilly. In fact, we're very disciplined with the number of collection centers that we operate. I don't want to say or suggest in any way that we are reducing our efforts in the GP market because we're very, very strong in that market as well, and always have been. It's just that we've grown our dominance in the other sub-market, which is now a very significant market and growing faster than the GP market.
Thanks, Colin. I'll leave it there to give you hopefully some end insight.
Thanks, Steve.
Your next question comes from David Bailey with Macquarie.
Yeah. Thanks. Morning, guys. I'll try and be quick. second half 2022 for the base business looks fairly similar to the first half 2022. 6% was the growth you grew in first half 2023. should we expect a little bit better than that in the second half of 2023?
Paul, do you wanna. Maybe one thing I'll mention, it's Chris Wilks here, is that historically, the second half, you guys will remember, has a little bit of a seasonal effect. I recall before COVID, it was, you know, kind of at the EBITDA line, you know, 55%, 45%, something like that in terms of. We might see some of that come through, but it's probably, it's a little hard to tell 'cause we're still coming out of the COVID pandemic. Paul, is there anything else you'd add?
I think the only comment we'd really make, is that it started well on those January numbers. I think the January numbers would have been better than the corresponding period. Hopefully the rest of the half is as well.
Sorry. If, you know, this is not a clear cut. I mean, it's a very good question, but not a clear cut answer. You know, just going on from what Paul said, given that we're coming out of the pandemic and returning to normal base business activity in the clinical market with some potentially with catch-up testing, it's possible that the second half of this year will have a bigger skew relative to H1, excluding COVID of course, just base business. The 55/45 might be there or even a bigger delta between the two. It's not clear. That's part of the reason why we haven't given guidance because it, you know, it's just so difficult to predict. You can.
I mean, I think it's quite possible, certainly in our Australian businesses, it's quite possible that there will be a bigger gap than that 10% that we would normally have had between H2 and H1 in this particular financial year.
Yeah. Got it. Just in terms of labor costs, looks to be about 3.5%, excluding acquisitions. ProPath should be in the PCP now. I mean, is that the kinda, the growth we should expect for labor costs in the second half?
I guess that's a combination of the FTEs and the pay increases. As we've mentioned, depending on what happens with COVID, we're trying to manage labor costs down in line with that. If COVID plateaus out, there might be a still little bit of a saving in labor that we can make. If COVID keeps going down, we'll probably be moving labor costs down a bit as well. I don't know. Is there anything, Paul, you'd add to that? That was the end of the answer.
Oh, sorry. Okay. No, sorry. Didn't hear Paul. It's all right. Thanks.
Thanks.
Your next question comes from Andrew Paine with CLSA.
Yeah. Hi. Thanks for taking my question. I'll try to be quick. Just looking at your EBITDA margins, trying to compare them to your update in November, and then, you know, the exit rates the last two months of the half. Looking at that, EBITDA margin was about 22.1%, stepped down from 22.8%. Just trying to see, is that final two months kind of reflective of what you think will happen over the second half this year, knowing COVID's gonna step down, but you've got that increase in the in the base business revs to potentially offset that?
Andrew, there is a seasonal impact with December. We would always expect the margin for the You know, for a short period that includes December to be a little bit lower than the rest of the period. I wouldn't read too much into that.
Okay. like 22.1%. you think that's like on the lower end then?
I don't think we're giving margin guidance, so I'm not gonna answer your question.
Just to emphasize what Paul said. You know, with a bunch of fixed costs and a number of holidays in December, that has an impact on margins. We don't normally.
Okay. No problem. Thank you.
We don't normally give details on one month, so it's a bit unusual to have that visibility on the two-month period.
Yeah, sure. Got it. Cheers.
There are no further questions at this time. I'll now hand the conference back to Dr Colin Goldschmidt.
Thank you, everyone, if you're still on the line. Have a good day. Thank you very much, and thanks, for coordinating, Stacy.