Good day. Thank you for standing by. Welcome to the Sonic Healthcare Financial Year, ended June 30th, 2023, finance conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will hear an automated message advising you that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to today's speaker, CEO, Dr. Colin Goldschmidt. Please go ahead.
Thank you very much, good morning and good day to everyone on the call, however you've dialed in. It's a warm welcome to you to Sonic Healthcare's full year results presentation for the year ended thirtieth of June 2023. I'm joined today by two of my colleagues, Chris Wilks, CFO of Sonic Healthcare; and Paul Alexander, Deputy CFO of Sonic Healthcare. Before we go to the slide deck, and as an introduction to the presentation today, I think it, it probably makes sense for me to say a few words about Sonic Healthcare, where we sit right now. Perhaps just to position the company in relation to the result that we released today. The financial 2023 year was very much a transition year for Sonic.
It was a year of moving away from what has been, probably the most tumultuous three years in the company's history. Unlike most other companies, Sonic, as a healthcare company, found itself at the very center of the pandemic. We were called upon to deliver a huge and important new service, and so our activities actually increased during the pandemic. We had to literally pivot at very short notice and turn up our engines to maximum speed in order to respond. Respond, we certainly did. Instead of going through the gigantic efforts of our global staff to respond to the pandemic, I want to say that we have left that tumultuous period behind and find the company in a much stronger position and our people in a positive and upbeat mindset.
With COVID revenues falling sharply through the year, and especially in the second half, we have already initiated a program to accelerate the reduction in legacy COVID costs associated with the pandemic. These are mainly labor costs, and we'll give more detail as we present the result this morning. As a consequence of the pandemic, however, our, our balance sheet has strengthened considerably, giving us real firepower to acquire synergistic businesses, and three such acquisitions have been announced recently in the second half, and there are more in the pipeline. At organic growth level, it's really pleasing that our base business growth has returned, and it's returned with some strength and with increasing momentum. As most of you know, our weighting is towards specialist referrals, which is a result of our medical leadership model, which has been in place now for decades.
That weighting towards higher-end work is paying off because we see those referrals growing at a higher rate than others. As a result, the company is very involved in higher-end, higher-value services in both pathology and radiology. In pathology or laboratory medicine, it's in fields like genetics, high complexity, anatomical pathology, the microbiome, and in general, specialized, more esoteric tests. In radiology, it's in the higher-value examinations and modalities like CT, MRI, and PET/ CT. With the return of strong organic growth and with the return of M&A activity, and with a range of activities to grow earnings and margins now locked in place, Sonic has come through the pandemic stronger than before and really in pretty good shape to grow into the future. That's a few words, just as a positioning statement for today's presentation.
If I can take you to the deck now. We'll start on slide three, which hopefully you have in front of you as we speak. This is our headline slide, and it shows our headline numbers. The first thing that I would want to call out is just the strange comparative that we have this year between FY 2023 and 2022. If I point you to the COVID revenue number, that puts it very starkly. You can see in FY 2022, almost AUD 2.5 billion of COVID revenue versus just shy of AUD 500 million in 2023, making the comparatives extreme in this particular year.
If you look at base business revenue, the growth is pleasingly 11%, and of that 11%, 7% is organic, and we'll come back to revenue in a later slide. The third bullet point there is just pointing out the momentum in our base business revenue growth. We've seen an acceleration between H1 and H2, and that is continuing into July. Earnings per share, we've compared to pre-pandemic levels, and it's up almost 20%. In terms of cash generation, our conversion of EBITDA to gross operating cash flow is at a very nice 110%. The board has declared and ratified a final dividend of AUD 0.62 per share, which is fully franked.
For the full year, our dividend is up 4% to AUD 1.04. As I've mentioned, we've announced three synergistic European acquisitions during the second half, with a total enterprise value of AUD 890 million, and we are currently progressing other acquisitions and contract growth opportunities. Our future growth, as I mentioned, is now secured with a very strong balance sheet that will give us firepower in this particular space. Moving on to our guidance, we haven't given guidance for four years now, so it's a welcome back to the post-pandemic and more normal environment. We're giving guidance at EBITDA level of AUD 1.7 billion-AUD 1.8 billion.
Now, this equates to up to 5% growth on FY 2023 EBITDA, and this really is an indication of our base business offsetting the material reduction that we're facing in COVID-related earnings as we go from FY 2023 to FY 2024. Our interest expense will increase by approximately 25%, reflecting the recently announced acquisitions, the tax rate will be between 25%-27%. In terms of guidance considerations, as usual, our guidance assumes current currency exchange rates and interest rates and includes announced acquisitions only. With those announced acquisitions, the majority of the synergies are going to flow post-FY 2024.
Our guidance does include the PAMA fee cuts, which we've spoken about before in the USA, of approximately $10 million, although these cuts are not a certainty at all at this stage. No other regulatory changes are assumed. If we can move on to the next slide, talking about our earnings growth. As I mentioned before, and I think we've got to keep talking about this, we are transitioning at the moment from very high COVID testing volumes, to an intense focus on base business revenue and earnings growth. Our second half FY 2023 margins are clearly impacted by legacy COVID-related labor and infrastructure costs.
As I mentioned in my introduction, we have now set off a formal program to reduce those legacy COVID-related costs, which are mainly labor, and we do that in a humane way by natural attrition, which is the way we always do it in Sonic. We're pretty confident that this program will be successful through the financial year. In place, we have a whole range of drivers and initiatives which are also locked in, which will feed to earnings growth and margins through FY 2024 and 2025. Perhaps the most important one of these is our strong base business organic growth and the momentum that we've got, and of course, the operating leverage that will come from outperformance in organic revenue growth.
It's always been a strong feature of Sonic Healthcare going back many, many years, and we've seen this come back with some extra vigor in the post-pandemic period. I've mentioned the post-COVID normalization of our workforce. The recently announced acquisition of SYNLAB Suisse gives us a real opportunity to integrate a sizable lab of CHF 100 million, so that's about AUD 160 million, into our existing infrastructure in Switzerland. The benefits from this acquisition will flow progressively over the next few years. There'll also be revenue and earnings and synergies coming from the other recently announced acquisitions. That's the two in Germany and ones prior, which are still flowing through into the FY 2024 result and beyond.
We've also piloted a revenue enhancement product in our U.S. system with great success, and we're now rolling that out throughout the U.S., and there will be material upside coming from that. We have the benefit of indexation of our fees in a number of our markets: Radiology, U.K., Belgium, and our primary care business here in Australia. We're undertaking rationalization of laboratory infrastructures in two locations, one in Hamburg, where we will merge three labs into one location, and Munich, where we'll put two labs into one location, and there will be benefits flowing from both of those. I'm gonna be talking more about digital pathology and AI, because this is a big ticket item coming down the pike, which is right in our space, and something we're really excited about.
Of course, there will be ongoing procurement initiatives, which will also feed to savings. Of course, our future growth is gonna be augmented by additional acquisitions and contracts, including those that are under consideration at the moment. It's really pleasing to say that M&A is back after a fairly quiet period through the pandemic. Of course, our strong balance sheet and our market position globally gives us a real strong position in this particular space.
If we can move to the next slide, and you might be wondering why we've put this slide in so early in this presentation, it really is to begin a discussion and, with the market, with anyone interested in Sonic Healthcare, to give you a sense of something that's really revolutionary that's coming, coming our way in pathology. AI, everyone knows about. Digital pathology is something that is also, something that will be hitting us in a big way very, very soon. AI itself, is going to apply to our lab division and our radiology division, and will provide us with step changes in efficiency, quality, and capacity of its own.
In the space of pathology or our anatomical pathology in particular, there is the revolution of digital pathology that is yet to come. This means, the digitization of specimens and a movement from analog, glass slides and a microscope moving towards a digital world, where cases will be examined on a screen, in digital format. Now, this has happened in radiology, many years ago, but it hasn't happened yet in anatomical pathology. The technology is now at a level where this is, every bit as good as looking down a microscope. As somebody who is trained as a histopathologist, even though I'm not doing it anymore, I can tell you that it's a very exciting change, and we look forward to it very, very much.
In the case of Sonic, we are one of the world's largest anatomical pathology providers. Our revenue, just an estimate, is in excess of AUD 1 billion in that particular space, and we employ more than 1,000 anatomical pathologists around the world. This is huge. So you get an idea, this digitization is happening only in anatomical pathology. That's the change that's going to occur. We, Sonic Healthcare, are big in anatomical pathology. Just to remind everyone what anatomical pathology is, it's the diagnosis of disease by the examination of tissue specimens, and in particular, the diagnosis of cancer. 100% of cancers need to be diagnosed via anatomical pathology.
Currently, and for, for many, many decades, it might even be 100 years, these diagnoses have been made by embedding a, a piece of tissue in a wax block, cutting very thin sections, staining those sections, and putting that under the microscope. This will now change, where we will scan the slide, digitize it, and put it on a screen, ready to be diagnosed digitally. This is, this has commenced already, and anatomical pathology is at, in the early stages of a revolutionary change, to digitization, and we are at the forefront of this. We are very, invested and involved in the process and, hopefully will lead the market in this space. Just to go on, Franklin.ai, our, our joint venture in pathology, is in the AI space.
You've got to separate digital pathology and AI. You need digitization to get to AI. Our joint venture with Franklin has been hugely successful to date. I've mentioned before that the enormous synergy that exists in this partnership, where Sonic Healthcare is providing deep, deep experience in anatomical pathology, and Franklin is providing deep experience and technology in the AI space. You put those together, and it's amazing synergy, quite frankly. We're nearing completion of our first anatomical pathology AI product, and the validation studies are set to begin in early calendar 2024. Just to remind everyone that the products coming out of Franklin are not only to be used internally, but we plan to sell these products globally. We also have an investment in Harrison AI, and please accept apologies for all the names.
Harrison.ai has a radiology AI product through its Harrison.ai Radiology company. That chest X-ray product is now deployed throughout Sonic's radiology branches. The second product, which is a CT brain AI application, is now in final evaluation within Sonic, and we hope that that will be utilized not just within Sonic, but globally soon, too. Excuse me. Moving on to the next slide, I've mentioned the final dividend of AUD 0.62, which is up 3% on last year's final dividend, bringing total dividends for the year to AUD 1.04, which is up 4% on last year. There's a 100% franking of the final dividend, record date, 7th of September, payment date, September 21. Of course, this maintains our progressive dividend strategy. The chart on your right is updated.
We have shown it before, it now includes a full 30 years of Sonic Healthcare dividend payments, full year dividend payments. Going back to 1994, when the maiden dividend of AUD 0.02 per share was paid, we're now at AUD 1.04. It's a record that the Sonic board and everyone in Sonic is pretty proud of, and we certainly hope to maintain this progressive dividend record into the future. Moving on to capital management, you'll see in the table that our net debt has increased slightly, AUD 74 million. That does include foreign exchange movements of AUD 43 million. Our on-market share buyback of AUD 425 million is now completed and closed.
As at June 30th, we had headroom of AUD 2.1 billion, but that was before the final dividend was paid and before expenditure on the announced acquisitions. You'll see from the chart on your right that our debt cover is still extremely low, less than one. You'll see that our gearing ratio in the table is less than 10%, and interest cover is at a pretty, very, a very healthy, almost 30x level. This is really to, to show what I mentioned earlier, that there's a lot of firepower in this balance sheet for further growth.
Next slide is on revenue, and if I could take you to the chart on the left to start with, which gives you, a snapshot of the last five years in terms of base business revenue and COVID revenue. The COVID revenue in the red or cerise or pink, whatever color you're seeing there, gives you an idea of what's happened through the pandemic, starting off with AUD 400 million of COVID revenue in FY 2020. Remember, that goes to June 30th, 2020. The pandemic kicked off about February 2020, and then ramping up to AUD 2.4 billion in FY 2022, and then coming down to AUD 0.5 billion in FY 2023. We'll talk a bit further about COVID revenue, but then moving to base business revenue.
Our total base business revenue, including M&A and FX, is 11%, but organic base business revenue is up 7%, as mentioned earlier. That's the AUD 7.7 billion over the AUD 7.2 billion. If you look at base business revenue over pre-pandemic levels, it's up 13%. I've mentioned that more and more, we are being, we're more weighted towards specialists and hospital referrals, which are higher value and are growing stronger than other referrers at the moment. The strong organic growth is continuing through to July, which was up 8%.
Just looking at the chart on the right, which splits COVID revenue by month in FY 2023 and July, which is FY 2024, you'll get an idea here of the dramatic fall that's occurred through the FY 2023 year in COVID revenue. This goes to the subject of our COVID costs and COVID labor that really needed to still be in place. I don't think anyone was expecting this rapid a decline in COVID revenue. It's good news in general, and we're very happy to take it, but we had to keep in place instruments, people, and in some case, drive-through centers, infrastructure for COVID, which we are now rapidly dismantling.
You can see that in July, we're down to roughly $10 million of COVID revenue, and I don't wanna be the one to predict where it's gonna go, but it's gonna continue to be low. I think we're all going to agree with that, and in a very short space of time, COVID testing will become part of our base business, where it's included into respiratory panels that we test for other respiratory viruses as well. I think this, this is an important chart in at least describing where Sonic has moved through the financial year to, from a position where we were still doing quite a bit of COVID testing, to where we are now, where it's almost disappeared.
There's a short lag that follows this in terms of removing legacy COVID costs, and that's where we're at at the moment. The next slide shows our normal split of revenue. Again, it shows what it has shown before. I've actually compared this to last year, and I've compared this to pre-pandemic, and the interesting thing is that whilst the absolute dollar numbers obviously change with Sonic's growth, the split and the percentage have stayed fairly consistent, which means that we're experiencing consistent growth in all our divisions, roughly in line with each other, which is really good news.
We have now in this chart, three really large divisions, and two, that's U.S., Australia, and Germany, in the medical laboratory space, pathology space, and two medium to large entities, that's U.K., Switzerland, and also radiology, outside of the lab segment. We're gonna run through the country slides quite quickly. First, the USA., where we experienced base business organic growth of 4%. At an operational level, our teams in the U.S. have done a great job to keep the workforce maintained at below pre-pandemic levels. I want to call out on this presentation, as we have before, our exclusively licensed thyroid cancer genetic test, ThyroSeq, which continues to be a real star performer with revenues now approaching run rate of AUD 100 million per annum. It's incredible.
That's one test, that's bigger than small labs and even medium-sized labs. We expect that revenue to continue. The revenue growth to continue, well and truly into the next several years. I mentioned that we've piloted an enhanced revenue collection system. We're rolling that out at speed, and there, there will be material upside that comes from this product into future years. I've mentioned the PAMA fee cuts, which are in our guidance, but they have been deferred, ostensibly to the beginning of next year. There is legislation, that's the SALSA legislation, that's Saving Access to Laboratory Services Act, which is there in Congress, and hopefully will be successful to delay or reduce those cuts that are pending.
Moving to our Australian pathology division, base business organic growth was strong at 11% through the year, especially from the high end. Specialists, anatomical pathology, genetic testing, esoteric testing, et cetera. At operational level, Sonic in Australia was selected as the only private lab to participate in a very meaningful and important way in the PrOSPeCT trial, which is a landmark trial for national cancer genomics. This is profiling of cancers, which will then be handed to pharma companies for clinical trials and new cancer therapies. We've partnered with Microba as previously announced, and we are working on some incredible products with Microba in a very synergistic partnership, one of which is called the MetaPanel, which we believe is a world-first product, which includes a comprehensive test for rare gut pathogens.
This is in addition to Microba's microbiome testing, where you're testing for normal organisms in the bowel. This is a separate, and very important, product that is about to be released. We're also nearing the completion of stage two of the Sullivan Nicolaides Laboratory building in Brisbane. This is an AUD 80 million project, which was foreshadowed when we built the lab five years ago. We hope that it'll, it'll complete early next year, and it will support future growth and efficiencies. Moving through to Germany, base business growth, a very healthy 10%. Again, strong growth from specialists driving anatomical pathology, genetic testing, molecular testing, high-end testing in general. We've completed two regional laboratory mergers, and two further ones are planned in Hamburg and Munich, as I've already mentioned.
We've also commissioned a new Biovis lab. Biovis is based in Limburg, Germany. It is the market leader in microbiome testing in Europe. We also continue to do very well with our exclusive Oncotype DX breast cancer genetic testing. We are the only lab in Germany and Europe doing this test, and growth is very healthy in that particular test. Just talking a little bit more about the German acquisitions. Firstly, the Diagnosticum laboratory group, these have been announced previously. If you look at the map, these are represented in red dots on the map. This business has revenues of about EUR 65 million. That's over AUD 100 million, gives us a highly complimentary footprint with a series of labs across Eastern Germany.
This is a very respected lab, giving us access to locations where we do not currently operate, also opportunities for synergies with our existing operations. Medical Laboratories Düsseldorf annual revenue is about EUR 50 million per annum, AUD 84 million. Both of these deals will close in Q2 FY 2024. MLD is a leading and very high-quality lab based in Düsseldorf. Düsseldorf is in the state of North Rhine-Westphalia. That is Germany's most populous state. I think the population is around 18 million. That's almost one Australia in one state. We see a lot of growth ahead for this lab in that very populous area. Just to call out that there are further acquisitions coming down the pike in Germany. Moving on to U.K.
Base business organic revenue growth is 6%. Important to note that this is on top of 24% base business growth in the prior year. Incredible performance of our U.K. division. This growth is coming from both our private work and our NHS work, partnerships with NHS Trusts. We've mentioned several times before, the sizable NHS contract, Hertfordshire and West Essex, taking a bit longer than we thought to close, but it is now in final governance process. In the meanwhile, we've been awarded preferred bidder status in another NHS Trust, partnership, with the Whittington Health NHS Trust, that will be for a minimum of five years. There are more NHS partnership deals to come.
Moving on to Switzerland, where on the face of it, base revenue growth of 1% doesn't look all that healthy. Bear in mind, there was a fee cut almost at the beginning of the financial year of 7%. So you really have to look at that 1% in light of the 7% cut, meaning that that's very strong organic growth, including market share gains, completely offsetting the impact of that fee cut. Switzerland is another market where we lead the market. We are very strong with specialist and high-end referrals, as I've mentioned, for our other countries. We have a big plan set now for SYNLAB Suisse.
If you go to the next slide, where we show a map, of our laboratories and the SYNLAB Suisse labs, you'll get an idea that, this is a very complementary acquisition for us. SYNLAB Suisse's revenues are roughly CHF 100 million per annum. That's about AUD 175 million per annum. It's a big business, and, it is currently at break-even level. We've made this acquisition with full knowledge of this, but you'll see from this map that, this is right in Sonic's wheelhouse, where we can, provide a home for this big business and all the labs and all the staff, but at the same time, work, in, in tandem to, improve the, the, the, the profit- profitability of this, company in the years ahead.
Importantly, if you look at the map again, SYNLAB Suisse covers the whole of Switzerland. That's all three language regions, but very importantly, gives us access to the Italian-speaking area or Ticino area of Switzerland, which is on the right-hand side of this chart, where we currently do not operate. There is potential for further acquisition in Switzerland. Moving on to Belgium, base business organic growth was a healthy 12%. There was fee indexation from January 1, 2023, of 6%, and our lab in Antwerp has now completely refreshed its workflow and automation and is operating very well under the new system. Moving to radiology, revenue growth was 13%, with organic revenue growth of 11%, earnings growth of 20%, and margin expansion of 150 basis points.
Our radiology division is performing outstandingly. There's a combination of factors behind this. Improved same-site revenues, underpinned by brownfields expansions, where we install MRI, CT, and PET/ CT. There's a focus on cost control. We've got new Medicare-funded MRI licenses, and our expansion into Melbourne and Victoria has been successful. There's a number of factors, and we expect our radiology division to continue its stellar performance into the future. Moving on to our primary care division, Sonic Clinical Services. Revenue there was down 10%, and that's mainly because of the cessation of pandemic services, and those were mainly vaccination services. We saw revenue improvement in the second half due to increasing doctor hours and also the move towards more private billing by GPs.
Obviously, the decline in earnings has come with the lower revenue. The outlook is more positive for FY 2024 as private billing increases, and also, with government funding increases, which were announced in the May budget. There will be indexation of general practice from July 1, 2023, and those targeted fee increases from November 1, which for the Australian audience on this call, that's a tripling of the bulk bill incentive for pensioners and under 16 year olds. That change will be material for Sonic Clinical Services. We've also announced our defense contract win for pre-recruitment medicals. That has now commenced on July 1 of this year, and that will add revenue of approximately AUD 30 million per annum.
The next, the next slide, just is an update on our ESG and sustainability progress, which has been very substantial. Just a quick comment that sustainability is a global project within Sonic, it's a huge project being coordinated and led out of our global office here in Sydney. There's information there about progress on our key short-term goals. Also, pleasingly, just to give you an update on how we're being viewed by independent ESG rating agencies, our ratings are improving as shown in those boxes there. Going on to the final slide. Just to summarize the picture that I've presented this morning. A key feature of Sonic at the moment is strong organic-based business revenue growth, which is gaining momentum.
Our organic revenue growth is enhanced by our market strength, particularly in the specialist and hospital market segments, and also augmented by our exclusive rights to particular diagnostic tests like ThyroSeq, Oncotype DX, Microba, which I've mentioned. We have earnings growth initiatives in train, which will feed to margins as I've mentioned. We're investing heavily in automation, IT, digital pathology, and AI, all of which will drive growth, efficiencies, and margins. On the M&A front, the future looks really bright in terms of integration of existing acquisitions and new acquisitions in our pipeline. I want to end by mentioning our 41,000 global staff. I think we're extremely fortunate to have culturally united staff under Sonic's Medical Leadership Model.
You know, we do see Sonic as being a different company, we actually refer to medical leadership and our core values as the Sonic difference. I think we're extremely fortunate to have strong, stable, and experienced managers, pathologists, and radiologists throughout our global footprint. When you add our staff to this, I want to take the opportunity right here to say a huge, big congratulations, and thank you to all our staff for their participation in Sonic's progress, and particularly in the results that we've released today. Thank you for the presentation, and I'll hand you back to our moderator, where we can start with your questions. Thank you.
Thank you. As a reminder, if you would like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. One moment while we compile our Q&A roster. Our first question is gonna come from the line of Chris Cooper with Goldman Sachs. Your line is open. Please go ahead.
Thanks. Morning. You mentioned that the currency translation risk is increasing. Can you just confirm on that EBITDA guidance, what currency pairs you've struck that at, please?
I'll give this one to Chris.
Yeah, that's Chris, is it? Chris Cooper, is that right?
Correct. Yep.
Yeah, Chris, yeah, we've used, I think we mentioned it actually in the guidance slide. I think that we've used current rates. I guess that's the best indication we've got.
I just want to confirm what current rates are, just 'cause we've seen a bit of weakness in the Aussie dollar since the start of the fiscal.
Well, I actually don't have them just from the last couple of weeks, so, it probably reflects-
All right.
that change you're talking about.
Fine. Thank you. Just on the comments around the sort of post-COVID normalization of the workforce, I mean, I know this is something you've been working on for at least a year, and it surprised me a little that you were sort of calling out that there was still a lot of costs related to labor and infrastructure still in that second half. Could, could you just give us an update there on, on sort of the progress and how much more cost is yet to come out from specifically COVID, please?
Short of giving you actual numbers, it's as I've, you know, described in relation to the chart showing the falloff in COVID testing and COVID revenues, it's, we there's a lag phase in dismantling the infrastructure in place there. You know, I can't give an actual number, but it's a significant program. It's been in train not for a year, but for less than a year. It's ongoing and, you know, will be material once completed.
Okay. Just one final one, if you don't mind. Just, just on average fee. I mean, obviously, average fee is gonna be declining here on lower COVID volumes, but I'm more interested if you could sort of segregate for us how that average fee is looking just on the base business, just as the organic sort of volumes continue to tick up?
Yeah. This is gonna vary by country, and vary between our lab divisions and radiology. In general, with the increasing growth in specialists and hospital referrals, our average fee does go up. Obviously, it's come off from from the COVID years. If you just take base business, we have a history of average fee growth over a long period of time, and there's a couple of things there. It's higher-end testing, and it's also what we call enrichment, where, and in some cases, there are more tests being ordered per patient. Because when we talk about average fee, just for everyone else, we're talking about a fee per patient, whether you have one test or 10 tests or, and whichever radiology examination you have.
It-- when I say it varies by country, Australia has this peculiar thing called coning, where a referral from a GP, only three tests are paid for. That doesn't apply in other countries, but it's very significant here in Australia. The more non-coned work you have, the better off you are in terms of average fee. This is, the importance of being in, being more dominant in the specialist and hospital space, which doesn't have coning applied to it.
Okay. Thanks very much.
Thank you. One moment for our next question. Our next question is gonna come from the line of Steven Wheen with Jarden. Your line is open. Please go ahead.
Yeah, good morning, Colin and Chris. Just wanted to ask about the margins, the DACH margins. When you gave your commentary around the interim result, you indicated the base business was back to. What, what has happened to the base business?
You're cutting out, Steve. Hello, is the moderator there?
Hello?
Yeah, you cut out. We didn't hear the question.
Okay, sorry. I'll start again. Just a question on the.
No, you're cutting out, Steve. Are you on a strange line? Hello? Hi, is the moderator there?
Oh, I am. We can move to our next question. Just a moment. The next question is gonna come from the line of David Stanton with Jefferies. Your line is open. Please go ahead.
Good morning, team. Thanks for taking my questions. I better start by asking, can you hear me okay?
Yes, all good.
Thank you. Thank you very much. Look, just, just two from me. Firstly, just, perhaps for, for Chris. Just looking at, potential for depreciation number for 2024, should we expect that to sort of be flat or slightly increased, given you've, given your CapEx profile in the previous couple of years? Any, any help in that would be greatly appreciated.
Dave, look, the CapEx has been a bit higher in the last few years, largely as a consequence of the building program that Colin touched on with the program up in Queensland and in Germany. It like in 2023, we spent about $160 million on buildings. Whilst that's a chunky CapEx, the depreciation on that is pretty low, generally at 4%, I think. There will be some knock-on effects, but I think the base depreciation, it gets a bit confused now with AASB 16, but is around about, for 2023, about $260 million. You'd expect some of that to increase a bit with that CapEx. I guess you could do your own numbers.
There's going to be a little more because we've still got the tail of some of those building projects, particularly in Munich and in Brisbane. I think the estimate is probably about AUD 100 million, something like that, AUD 90 million-AUD 100 million in the FY 2024 year, and then those projects in CapEx year on those projects, and then that will be those will be finished, and there's, there's no others right now that we're expecting in the next year or two.
David, it's Paul here. Of course, there'll also be some additional depreciation related to the acquisitions that we've announced.
Sure. Could you give us then a sort of a broad brush number for CapEx for 2024 as a follow-up?
We know that number, obviously, but we haven't disclosed it.
Okay.
It should, you, you should allowing for that, that AUD 100 million, AUD 90 million-AUD 100 million for buildings, you should assume it's probably reasonably in line with depreciation plus kind of 10% is kind of the rule of thumb we've used historically.
Okay, thank you. Then, final question from me. Just in the guidance number that you've given of that AUD 1.7 billion-AUD 1.8 billion at EBITDA, you know, are you able to sort of call out at least approximately, you know, what the acquisition contribution might be? Thank you very much.
Look, we haven't disclosed that, but what we have disclosed is that, the German businesses are not gonna settle until the fourth quarter. We're hoping it'll be early in that fourth quarter. It's a little dependent on some regulatory things that you need to go through in Germany. The Swiss business, we settled, which we also mentioned on the July 3rd, so we've got that for the, for the full year. That we've mentioned is coming from a kind of zero base. I think over two or three years, we're expecting some strong synergies from that acquisition, but I wouldn't put a huge number in there for the guidance that we've given. Just probably a little bit at the back end of 2024.
Understood. Thank you very much.
Thanks.
Thank you. One moment while we move to our next question. Our next question comes from the line of David Bailey with Macquarie. Your line is open. Please go ahead.
Thanks. Morning, Colin, Chris, and Paul. Just, just following on from Dave's question around 2024, maybe just, can you just give us a bit of a sense as to what you're thinking around base revenue growth versus COVID expectations? Then as a follow-up, just in Australia, just your observations around specialists versus GP trends and what your expectations are, are for those particular channels going into fiscal 2024 as well, please.
David, in terms of COVID revenue, as I mentioned earlier, it's, it's impossible to predict. July's number is at AUD 5 million for the month, coming off a steep decline. It could go, it could stay at AUD 5 million. It, it's gonna be something in that order and even less through the year. Then all the rest of the growth, at, at base business organic level will come from our referrals. Yes, you know, so the question about specialist referrals versus GP referrals really has to be seen in the light of a very long-term play. Sonic's medical leadership model, right from the outset, was a model based on the employment of pathologists and the development of higher-end technical expertise, which then attracts specialists and allows you to deliver services to hospitals.
A, a lower-end complexity lab just couldn't do that. You, you, you have to have, in particular, for anatomical pathology, expertise in pathologists, pathologists who are specialized in selected systems. So, you know, Uropathologists, gynecological pathologists, GIT pathologists, et cetera. And the, and by doing that over a long period of time, you begin to attract clinical specialists. This is, this has been playing out. You cannot do this overnight. It's 10, 20, even more years in the making. Because of our medical leadership model, this has been replicated overseas as well.
When you look at Germany, and you look at Switzerland, and even if you look at the U.K., we are providing, and the U.S., we are providing, top-end lab services, and that attracts the specialists in hospitals, and that feeds to higher average fees, and it feeds to higher value tests in general. In Australia, it feeds away from this thing called coning, and in general, gives a much healthier financial outcome. I should just say that if you attract specialists because you're an expert in anatomical pathology, you will also get their referrals of blood work and non-tissue, non-cancer specimens as well. There's, there's many elements to your question, which maybe we can, we can take offline at to some other point so that we don't bore everyone.
Maybe just to point back to that first question then, what sort of organic revenue growth are you assuming for fiscal 2024?
We haven't guided to revenue growth, so we can't really give you a number. We've obviously given you the rate in July and talked about the, the momentum. Probably leave it at that.
Thanks. Thank you. One moment, please. Our next question is gonna come from the line of Craig Wong-Pan with Royal Bank of Canada. Your line is open. Please go ahead.
Good morning. Just on that July organic revenue growth of 8%, is that sort of fairly similar across your different markets, or is there any markets that are kind of performing stronger than that?
If you look at the, the different growth rates we gave in FY 2023 per market, July has reasonably reflected that as well. There is some differential between the different markets.
Okay, thanks. Just with the enhanced revenue collection system being piloted in the U.S., just trying to understand, is this a new different offering, or is this sort of similar to what other competitors are doing in that market?
Yeah, Craig, it's Chris here. Yeah, look, it is an off-the-shelf product, but one that's been built just for labs. We have in the U.S., because we've grown over a period of time, had reasonable systems, but they're, they, they were kind of legacy systems, and so we've been, we've been trialing this for a little, for a little while. What essentially it does, because it's such a complex receivables collection method in the U.S., like every single claim, which might be $60, you have to go. It's like making an insurance claim for your car here in Australia, where you've got to give a certain amount of information. If you haven't got all the details, the claim gets denied, and you can keep trying to get the details.
What this new technology does is uses tech to clean up the claims, and so you don't get as many denials, and you don't write as much off. It's really just ultimately gives us a better outcome in terms of how much cash we've collected, how much revenue we generate from the work we've been always doing. Certainly the results we've had from two smaller rollouts has been probably even better than we expected. It's, it's, it's, we put it in there because it's quite material, because it potentially gives you just a chunk of extra revenue that goes straight on the top and bottom line. And it's in the, you know, you could assume it's in the mid to high single kind of digits. That sort of is what we might be expecting.
Okay, thanks. That's helpful. Then my last question, just on the digitization of pathology, I was wondering if there's many kind of costs or CapEx required to sort of set all that up?
Sorry, say it again, I just missed the start of that question.
On the digitization of pathology, like I was wondering whether you need to spend much on kind of costs or CapEx.
Yeah, there is a bit of CapEx, and maybe I'll hand over to Colin, but there's, I guess, the extra step is the scanning step. And that's where the technology has now got to a point where the resolution on that scanning is good enough that pathologists can feel comfortable looking at a screen, and the resolution on screens as well has got better, as everyone kind of knows. That's in the scheme of things and the potential benefits to flow, the cost of those scanners has come down a bit like computers come down in price, so it's not hugely material compared with the benefits that would flow. The payback on that sort of gear would be very, very quick. Maybe, Colin, do you want to-
No, you've said it all. That's good. It's his question on CapEx.
Yeah.
Great. Thank you.
Thanks.
Thank you. One moment for our next question. Our next question is gonna come from the line of David Low with JP Morgan. Your line is open. Please go ahead.
Thanks very much. Could we go back to, to David Bailey's question? I mean, just the, the trend in specialist referrals seems to have been quite strong and, and as you've said, Colin, Sonic's very well positioned to win that work. Why? Why did it happen, and is it gonna continue, or do you think we'll see a reversion to some degree back to previous trends?
There are two elements to this, David. One, you've got to consider this question in light of GP markets right around the world. Very much in Australia is a good example. GP consultation hours have fallen dramatically, and this is an issue in Europe, it's an issue in the U.S. as well, in addition to Australia. The absolute referrals coming from GPs are down on a relative basis compared to specialists. That's, that's part one of the answer. The part two is, is the where I've been talking previously. It really does depend on a lab's reputation and expertise, and we don't see this slowing at all. We, we don't have 100% of the specialist market in Australia.
We, we do think we are dominant in that market. If you, you have to actually count volume or, or dollars coming from that segment of the market. Sonic is very strong in every state in Australia, and if you look at Germany and Switzerland, it's the same. We believe that will continue because we have spent money on pathologists, on labs, on equipment, on technology. There's a whole range of things that go into our medical leadership model, which gets us to the position we're in today, and I think the benefits are gonna keep flowing for many years to come, if not decades, in this particular area, specialist referrals.
I think we can add that we've done some analysis that shows that our share of the market has steadily grown, which comes back to your point about, you know, if you provide great service, you, you do win market share, and that's been evidenced by the numbers. Whereas the market tends to be defined for whatever reason, because it's easier to measure by collection centers, but collection centers are irrelevant with this part of the market. I think it's worth pointing out that the market share is very different from collection center numbers.
Yeah. No, no, look, I, I think I get most of that. What I'm interested to understand is, has there been an uplift in specialist referrals post-pandemic, and therefore, is there a risk that maybe that normalizes and this solid improvement that Sonic's seen, as, as the dominant player, and the average price benefit that Sonic's seen starts to fade, and we see a bit of a reversion to the norm? I just wonder whether that's a risk.
Okay. On, on that particular point, we haven't seen a post-pandemic spike other than in selected subsegments here in Australia. Surgery for cancer, went up, in H2 FY 2023, that, that's a whilst it was important in terms of, our, our labs here in Australia, it's not material in the whole of Sonic's numbers. Yes, there was a. Maybe it's a catch-up, I don't know how you wanna describe it, but it did occur, and it's waned already. It was fairly short-term. I think this was, surgeons catching up on elective procedures, and even, non-elective procedures, quite frankly. We didn't, we didn't tend to see that elsewhere in the world.
I, I don't think this is something that was sort of a flash in the pan and gonna disappear. No, because the much more important element is the very long-term increase in our specialist market share, and all the benefits that go with that.
All right. Thanks. I might just change topics, if I could. Some of the other German lab groups have talked about pressure from the lack of funding increase. I was just wondering whether Sonic Healthcare's expecting anything on that front. Then if I could just squeeze another one in there. Chris, your comments then on the receivables package and the mid to high single digit benefit, can we understand? That sounds enormous. Am I applying it to the whole business, or is this going to be rolled out over five years? When do we see that benefit, please?
Yeah, look, it, it will be rolled out over. We're hoping that the last major rollout will be happening kind of at the back end of this current financial year, the 2024.
Just U.S.
Financial year. Yeah, this is- it's just the U.S., and it's probably not as significant an impact, 'cause, on the AP part, 'cause we use a different software in AP, and there's probably not the same sort of upside on that. It's mainly to do with the clinical side of our business, which, you know, of the AUD 1.4 billion is, you know, a bit over AUD 1 billion, something like that.
To clarify what you're saying, Chris, I mean, look, mid-single-digit improvements coming through in margins? I mean, I'm just trying to understand how significant are we talking about in AUD, because what you're saying implies an enormous uplift, unless I'm misunderstanding.
It is a fairly significant uplift, that's why we mention it. It's a weird thing, because it's just getting paid what you should what for the work you're being done, so it's no extra work, it's just making sure we don't end up writing off more because we, you know, we can't, we don't have all the details we need to be able to collect it, and because it's only $70, at some point in time, you make a few attempts to get it, and then you write it off. This, this technology makes that a whole lot more straightforward, streamlined, simpler. There's even a little bit of a benefit on the staffing side, as well as the extra revenue. So it's something that's quite exciting in terms of our business in the U.S.
Okay, it comes this year, and it's in the guidance? Is that the right way to think about it?
Only a little, only a little bit of it is in this year. More of it comes in 2025, and because it's the rollout. Our largest business, the rollout is only scheduled for later in this financial year. Probably more of it, a little bit in, in 2024, more of it, all of it hopefully, or close to all of it, would be in 2025.
Great. Thanks for that. Just quickly on Germany, and then I'll get off. Thank you.
Sorry, I forgot what your question on Germany was.
The, the competitors are talking about plenty of pressure on funding in Germany because they're not making any money, and therefore, funding needs to be reformed. Any activity or any expectation from Sonic on that, please?
Yeah, look, I think we've-- like, our numbers or our forecast is assuming there's no increase. You're right, there's some of our competitors there who have been struggling. You can understand them perhaps trying to put pressure on the fee levels. If that happens, then that would be upside. I'm, I'm not aware of anything in particular.
No, nor am I.
I don't think any of us are aware of anything in particular. That would be a bonus if it was to happen.
Great. Thanks very much.
Thank you. One moment while we move to our next question. Our next question is gonna come from the line of Sean Laaman with Morgan Stanley. Your line is open. Please go ahead.
Thank you. Good morning, Colin, Chris, and Paul. Hope you're all well. Still on the mix, I remember back at, back at the German site visit, I think the commentary at the time was that there was 5% revenue growth and 5% volume growth, and I think one of the business heads made the comment that, let's just say, we'll be happy if some of the lower-end cholesterol testing doesn't come back. I'm wondering, first question, if, if you've seen that lower-end cholesterol testing come back, as it were?
Sean, I would not be able to answer that very specific question related to Germany. I think in general, what we have found in Germany is that they're, on a relative basis, the lower complexity tests have reduced and the higher complexity tests have increased, and that has the effect of raising average fee. Whether that's because of the GP issue that I mentioned earlier or due to something else, don't know. It's not a negative for our business. You know, I've, I've had several of our managers in Germany say that this is actually a good thing if some of the less complex tests are slightly lower and the higher complexity tests are slightly higher. I'm not aware of cholesterol, in particular, falling in testing numbers anywhere in the world.
Sure. I, I meant just as using that phrase as a grab basket for anything that's-
I think.
lower end.
What we are seeing, Sean, is, is strong growth in higher complexity areas like the Oncotype DX test that Colin spoke to before, like microbiome testing as well, our Biovis business has been growing very strongly. The growth in those particular, tests is driving average fee growth as well.
I think, Sean, what you might have been referring to, what he might have been referring to was during COVID, perhaps people weren't going to get the normal screening things done because they were keeping away from doctors and all that sort of stuff. I guess.
That would contribute.
We're sort of getting beyond that now, where things are getting more back to normal.
Sure. Sure, thanks. Next question, kind of related to mix, so doing very well with ThyroSeq and Oncotype DX, and I imagine part of that is your medical leadership, but also the broad scale of your business, which is probably an attractive, fact for innovators of IP of these tests. You know, is this something that, that's gonna be an ongoing opportunity for, you know, more ThyroSeq-type tests in the future?
Absolutely. So, you know, we, we this is a benefit that we can't actually speak definitively about, but because of our position, our reputation, our medical leadership, all of that, you've said it yourself, puts us in a position to be prime candidates to get exclusive rights to these tests, if not to develop them ourselves. You know, a good example is with Microba, where we have co-developed the MetaPanel test, which I think will be a brilliant success going forward. Yes, you know, we'll, we'll wait and see how after its launch. That's a good example. We can add value to partners in this space. You know, so if you take a Microba, if you take a, you can.
The ThyroSeq is another example where we add value to the innovators and originators of these tests because of our expertise, because of medical leadership. So, you know, this is I think something that is gonna happen increasingly into the future. The whole area of, you know, these very specialized tests is gonna mushroom soon, particularly when you get to personalized medicine in terms of cancer treatment. There's gonna be a whole lot of testing required which will be very specific. The PrOSPeCT contract is another example where Sonic has been awarded that contract. Not everyone can do the testing that's being asked there, and Sonic's 2 genetic labs in Australia can do the testing.
We are the only private lab doing half of 20,000 genetic tests on cancers, so 10,000, with the remainder being done in highly specialized public labs. This is a very important area for us going forward, and I think ThyroSeq gives an indication of how big it can get from one test. It's incredible.
Great. Thank you, Colin. One more, if I can. It seems with most companies these days, you mention AI, and it earns you two PE points. On that, with respect to the chest X-rays and Annalise.ai in market, what's the feedback? Is this just something that's nice to use? Is it you're seeing genuine efficiencies and synergies generated from it? Is there any commentary you can provide, or is it just too early?
Yeah, so, by the way, two points of multiple, I think you said, we're not-- that's not what we're chasing. I-- you know, this, this is an important area in our space. In the case of chest X-ray. The tool that's offered from Annalise is an assistant to the radiologist, so there's no intention to ever replace a radiologist or a pathologist, but it's a very useful aid to verify and to assist the radiologist in making the diagnosis. In the case of a chest X-ray, which is generally a fairly rapidly completed diagnosis, this-- the efficiency gains would not be huge, as you might imagine. If you then move on to brain CT, which takes a bit longer, and where an assistant will perhaps be of more value, then efficiency gains are going to increase further.
Then if I switch to a pathology AI tool, and let's say you've got an assistant for prostate cancer, which is a complex, histopathological diagnosis, the synergy gains and the efficiency gains will be very significant. Moving right across the spectrum of radiology and pathology, I think you're gonna find a huge gain in efficiency when this is done and dusted. It, it's a, it's a, a revolution happening in both, both disciplines.
Awesome. Thank you, Colin. Thank you, gentlemen. Appreciate it.
Thank you.
Thank you. One moment while we move on to our next question. Our next question comes from the line of Laura Sutcliffe with UBS. Your line is open. Please go ahead.
Hello, thanks for taking my questions. Just a follow-up on the AI digitization piece to start with. Do you think that all of the markets you're active in can go down the pathway towards digitization and anatomical pathology at the same speed, or are some more amenable to that than others?
That's a fabulous question because what we are planning to do is to roll it out sequentially, not simultaneously, right around the world. There is some digital pathology being practiced in all our countries at the moment, but in a sort of non-uniform, large-scale way. Our first port of call is probably gonna be our U.S. market, where we are strong in anatomical pathology, following the Aurora acquisition and ProPath. We, we are hatching a plan to standardize that rollout.
The question, why it's important, is that it needs to be a national program because the beauty of digital pathology, where you digitize and have a central repository of cases, rather than having them in many labs with glass slides and stuff like that, is the ability to nationalize a whole subdiscipline. You can take, for example, skin pathology, which is probably our biggest referral, in anatomical pathology, and have a product for digital pathology of skin pathology, and then make it national, where all our dermatopathologists, the skin pathologists, can participate together, which adds expertise into a team and makes it a whole lot more efficient. We'll start off in the U.S. and then progressively roll it out elsewhere. There, there's an issue about enthusiasm and reluctance.
It, it's the way of the future, there's absolutely no doubt. This will definitely, definitely happen. The young pathologists are very keen. Some of the older pathologists might be more, more, wedded to their microscopes. That doesn't matter, because even if not 100% of our anatomical pathologists take on digital pathology, it won't really matter. We don't have to go all or none. I think the majority of pathologists, now that the technology is so superior to what it was in the past, will embrace the strategy and prefer it. It's much easier, it's more efficient, and the resolution on the screen is brilliant. And it's just the, the whole workflow and logistics of a pathologist are much easier. Yeah, I'm optimistic that the rollout is gonna be quite successful.
You need to stay tuned, because this is a space where we hope to be making future announcements. This is right in our space, and we're very excited about it.
It also enables AI. You can't have the AI-
Yes.
Without the digitization, so one's got to come before the other.
Yep.
That's helpful. Thanks. Then maybe just one more. Thinking about your M&A strategy, you've obviously mentioned some things in the pipeline in Germany, but just in general, what characteristics do you generally need such that something would fit within your ROIC criteria? Is it mainly always geographic adjacency, or are there other things that sort of get things to screen favorably? Thanks.
Yeah, so I mean, we've historically, it is, so the geography is quite important, but, you know, things are changing. For example, digital pathology is a good one where geography won't matter. We look at culture as well. We look at the reputation of the lab. We look at the potential to grow the lab. So we, we want to be sure that there's some integration benefit and synergy. Geography is important in terms of physical integrations, but we can add benefits even without that. For example, in procurement, is an obvious example, but also IT, and there's a range of other areas where we can enhance a business.
A good example is gonna be the SYNLAB Suisse acquisition in Switzerland, where, yes, the geography is good, but we, we'll add much more than physical integrations into that operation. I'm very confident that we'll turn a 0 margin business into something very profitable in the next one or two years. You can extend this question into, do we look at new countries? Because some people ask us that question. There we have a different range of factors. At the moment, we're not really considering new countries, and we would wanna be sure that a new country was suitable from a number of angles. You know, so if we look at stuff like, is there corruption there? What's the ethics, you know, risk? Is there language issues?
Is, can we trust the legal and accounting systems, et cetera. I hope that just goes some way to answer the question. We could go on. Next time we meet you, Laura, we can talk more about it.
That's super. Thanks very much.
Thank you. One moment while we move on to our next question. Our next question gonna come from the line of Andrew Martin with Peak Investment Partners. Your line is open. Please go ahead.
Good morning, gentlemen. Just a quick one on your digitization of pathology. I was really wanting to get some idea of when you feel that, that is gonna really kick in and be impactful on the growth.
Yes, that's a difficult question because it depends on a few things going forward. Yeah, I mentioned on the previous question that our first rollout is probably going to be the U.S. There's no doubt that there will be a lag because there's quite a lot of change involved in this before we start seeing the benefits. I don't think there will be too much in the 2024 numbers, but I think from 2025 onwards, it's likely that there will be. Obviously, we haven't quantified them.
Thanks, Colin.
Thank you.
Thank you. One moment while we move to our next question. Our next question comes from the line of Mathieu Chevrier with Citi. Your line is open. Please go ahead.
Morning. Thanks for taking my question. Just on the margins, were your base business margins and pathology in line with pre-pandemic levels in the second half of 2023? Then going into FY 2024, are you still carrying some COVID legacy costs?
Yeah.
Yeah, sure. Hi. Look, in the, as we try to explain at the, the first half, trying to work out what is our COVID margin and what is our base business margin, was extraordinarily complex. We did our best in that first half to, to try and do so, but when we certainly said that it was an, you know, an imprecise science. If anything, that got even harder in the second half, because as the graph shows in the presentation, the volumes dropped significantly. We had fee cuts in a number of our markets through that period. We had this trend of COVID testing becoming part of respiratory panels. More and more, it, it's intertwined with the rest of our business. Basically, it's become impossible to decide what's a COVID margin and, and what's a base business margin.
I guess really what we've tried to do is, is focus on what we think our earnings are gonna be going forward, and we've, we've given guidance for the first time in four years, as Colin said. I guess from that, you can sort of try and work out a, a margin going forward. We obviously haven't given specific guidance on margins.
Okay. Thank you. Then just on, on the radiology margins, I mean, they've been improving. Do you think there's much more room for improvement there, or do you think you've reached a, you know, a pretty good, steady rate?
Yeah, maybe I'll answer that one. Look, the margins in that business have been solid. It's a well-run division of ours. It's benefited a bit, as we've mentioned in the slide, from some indexation, which only started a year or two ago. That's starting to flow through to revenue on the bottom line. There's also some changes to MRI licensing arrangements that saw us secure another eight full licenses, which are in the more regional parts of our business. Yeah, look, we're pretty excited. We've got a fairly aggressive strategy for greenfields in 2024, including some brownfields, which we define in radiology as being new modalities being put into existing sites, things like PET/CT and the like.
You know, I'd be reasonably confident that we can, we can continue to, to grow that business nicely, both at the top and bottom line and, and probably margins a bit as well.
If I could add to that, there is a global trend, which moves towards the high-end modalities. This is not necessarily in Sonic's market. I'll come back to that in a sec. In general, more people are having MRI, CT, and PET/ CT than before, and that trend is set to continue for quite a long time. For example, in musculoskeletal or soft tissue injuries, sprains, query fractures, stuff like that, CT and MRI will be used much more frequently than a chest X-ray, than a, than a plain X-ray. So that's the one thing. The second thing is that in Australia, which is the only market we're in radiology, our radiology practices are very specialist dominated, in other specialist referral dominated.
Specialists tend to be heavier referrers of the high-end modalities when compared to GPs. We sort of believe that both of those factors will continue to drive average fee higher, which will feed to earnings and margins.
Thank you. One moment for our next question. Our next question is gonna come from the line of Andrew Goodsall with MST Marquee. Your line is open. Please go ahead.
Oh, thanks very much for taking my question. I'll, I'll try and keep it quick. Just looking at your guidance, just trying to understand or whether you can add any color just to how you see that sort of first half, second half weighted. Obviously, your, you know, your cost base is still unwinding, and your acquisitions are, are, sort of second-half loaded. Just, just any other color you can add there?
Yeah, Andrew, you might remember this, but before COVID came along, it was always a bit weighted to the second half, partly seasonal with our Northern Hemisphere business and that sort of thing. It was used to be, I think, 47, 53. That will probably be even more weighted to the second half because of some of the, the cost management programs we've got and the fact that the acquisitions, in particular, the three we've announced, that, two of them will only be joining us, you know, late in the first half anyway, and the other one's not really contributing to profit until probably the second half anyway. All of those things will, will see a, a fairly heavy weighting to the second half.
The U.S. revenue cycle.
Yeah, also the, yeah.
Also have more impact in the second half than the first.
Yeah. There's a, there's a few dynamics there that we'll see a fairly, probably a heavier weighting than we've seen historically.
Yes, that's my, that's my sense, like, it sort of seems the first half is the absolute bottom and then, then up. Just, just I guess, just one for Colin on, just looking at the Australian MBS data, I know you sort of do a bit of, bit better, bit above that, that number. It does look like, sort of base pathology's volumes is fairly flat. Obviously, benefits are up. I'm just trying to. I haven't sort of heard any sort of good explanation of what might be going on there, or are we just still in transition?
Yes. Andrew, to be honest, I don't follow those Medicare stats all that closely, mainly because I don't rely on them so much. I think the one thing just to bear in mind when looking at those comparative numbers is the issue with GP consultations and the referrals that come from them to pathology. If GP consultations are down, then GP referrals to pathology labs will be down. We've certainly confirmed this when we look at Sonic's Australian numbers, our referrals from specialists are outstripping our referrals from GPs. That could be a feature in the numbers for the whole market, which is what you're looking at. That's probably all I can say about that particular question.
Yeah, that, that probably aligns. It, it helps explains the benefits being up. No, that's, that's, that's terrific. Thank you.
Thank you.
Thank you. One moment while we move to our next question. Our next question is gonna come from the line of Saul Hadassin with Barrenjoey. Your line is open. Please go ahead. Saul, your phone might be muted.
Hello, can you hear me?
Yes.
Great. Thanks, Colin. Thanks, Chris. Thanks, Paul. Just a quick one. It looks like you spent just over AUD 80 million in the year on acquisitions. I know about AUD 30 million of that was in the first half. Can you just remind me what you acquired during the year?
Hi, Saul, it's Paul. Yeah, look, there's no single significant big acquisition in that. There was. It's a number of smaller things. You may be aware that our SCS business bought a group of clinics that were owned by a small-listed company here in Australia, Vita Group. So that's part of that. There are some other medical center businesses that were acquired. There was a small anatomic pathology practice in Germany. Yeah, it's just a number of sort of small businesses that add up to that number.
There's a small investment in a health IT business that ties in with some of our health IT strategy as well. That's part of that as well.
Great. Thank you.
Thank you. One moment while we move to our next question. Our next question comes from the line of Steven Wheen, Jarden. Your line is open. Please go ahead.
Yeah, thank you. I just wanted to go back to the margin question, with respect to, I understand the complexity of being able to separate margins between COVID and base business. I remember in first half, you were indicating that, part of the reason you've been able to get to pre-COVID margins was because of longer-term, consumable type contracts and EBA agreements. Just those two line items, specifically, I just wonder if there's been any reset of those costs during the second half of the year to perhaps, explain some of that margin weakness that, that has happened in the second half?
Steve, the biggest impact on margins in the second half is what we've alluded to in the presentation, which is the legacy costs related to COVID. Trying to manage the workforce and the infrastructure when you see those changes in volumes by month, it was quite a challenge. There's no question that we were holding costs longer than we've, you know, as it's turned out, we needed. If you look at that chart, you even see that in June 2023, it jumped up from what it was in May. That was not a huge in AUD terms, but that was largely here in Australia with the Australian winter, the start of the Australian winter.
You know, we're trying to to, to make sure we've got the capacity to deal with testing when it arises, but that means holding on to some costs. That, that's by far the, the, you know, the most significant factor in the second half margin. In terms of, yes, there would've been some EBAs roll, well, there were some EBAs roll over in that period. And so there would've been some increases that have come out of that. That's absolutely true, but there are others that are still ongoing. I don't think there was probably much change on the procurement front, but I might pass to Chris on that.
No, there's nothing significant on the procurement. But, Steve, as the fees were ratcheting down in the various markets for COVID, we were also pushing down our suppliers, which, you know, you might imagine at the start of COVID, there was, everyone was just desperate to get hold of kits at, at the price that was being asked. So that, that happened progressively over the course of the pandemic, and those prices are now down at more sensible levels, given the reimbursement rates. That's kind of happened. I think there's a bit of information, too, in the 4E, just in te rms of understanding our labor costs and the components of it that break up the movement between the two years that are, we're, we're comparing here.
You know, there's a, there's quite significant impact between the two years with some currency movement, FX movement, and M&A. We've tried to point that out to you. You can see that the underlying increase in labor is only a, only a 2%, and that's a, that's a melding of reduction in labor that's happened and some increases in labor cost.
Yeah, great. Okay, that's, that's, that's helpful. Just second question, I think I've picked this off the slides correctly. In Germany, in first half, your organic growth was 5%. For the full year, organic growth in Germany is 10. That would suggest a really strong second half of 15, I would, you know, just straight lining it. Could you sort of talk to what's happened second half versus first half to, to drive that surge?
Certainly, Oncotype DX is a, is a significant factor there. There has been extraordinarily strong growth in that, in that particular test line. But again, at some of the things we spoke about earlier, the microbiome testing, has been growing strongly. I think, you know, coming back to some of the earlier discussion, that, that, you know, there has been sort of a return to more normal activity in Germany in terms of people going, you know, to their doctors, et cetera. We have seen a significant pickup in growth rate.
Excellent. I'll leave it there.
Thanks, Steve.
Thank you. Showing no further questions at this time. This does conclude today's question and answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.