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Edited Transcript of IDX.AX earnings conference call or presentation 26-Aug-19 12:30am GMT

Full Year 2019 Integral Diagnostics Ltd Earnings Call

Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Integral Diagnostics Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anne Lockwood

Integral Diagnostics Limited - CFO & Chief Commercial Officer

* Ian Kadish

Integral Diagnostics Limited - CEO, MD & Director

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Conference Call Participants

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* Davin Thillainathan

Evans & Partners Pty. Ltd., Research Division - Research Analyst

* Matthew Nicholas

Crédit Suisse AG, Research Division - Director

* Steven David Wheen

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* William Macdiarmid

Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Integral Diagnostics, IDX, FY '19 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to the Mr. Ian Kadish, CEO and Managing Director. Please go ahead.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [2]

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Thank you very much. Our presentation today will be in 2 parts. We'll be presenting on the results for financial year '19, and then we will present on the acquisition and entitlement offer in a little more detail.

I'm pleased to report another strong year of growth and profit for Integral Diagnostics in financial year '19. We delivered solid growth in financial year '19, a 41% growth in our bottom line operating net profit after tax, 40% growth -- 39% growth in operating EBITDA, 30% growth in operating earnings per share, 23% growth in operating revenue and a 39% growth in our statutory net profit after tax. We successfully integrated significant acquisitions in Auckland and Geelong, and both of those acquisitions are performing in line with expectations.

We improved our EBITDA operating margin to 23% from 20.3% in financial year '18. This is an industry-leading margin in both countries, in both Australia and in New Zealand. The margin declined slightly in the second half versus the first half due to the investments in technology and in radiologist recruitment and retention.

We're also pleased to declare a fully franked dividend of $0.05 per share, totaling our annual -- bringing the total for the annual dividend of $0.10 per share for financial year '19 versus $0.08 in the prior comparable period. This is an increase of 25%.

And we expanded operations significantly over the course of the year. We completed our development of the St John of God Hospital in Geelong. We opened a new clinic in Miami Beach on the Gold Coast. We also completed our development of the North Melbourne Specialist and Research Centre that's co-located with the Australian Prostate Centre, and that opened in May of 2019. And we also installed 2 new high-end CTs in Western Australia, our busiest CTs in the group, to service the growing demand there. So we've nicely leveraged the platform to deliver strong sustainable growth.

We completed our restructure of the radiologist remuneration plan in financial year '19 by revising and implementing a Radiologist Loan Funded Share Plan in Australia and an option plan in New Zealand, which will broaden and diversify the radiologist shareholder base. The financial year '19 plan was completed and implemented in February of 2019, and we also had a second round in August of this year, earlier this month. And both were oversubscribed with $9 million worth of shares issued. $3 million was a direct contribution from the radiologists acquiring shares and $6 million was for a company loan to those radiologists who had acquired shares.

We developed a new incentive plan for our South Coast Radiology and Lake business units. That plan was implemented from 1 July, 2019, and is designed to incentivize to drive revenue growth and productivity. And we've also agreed to full escrow release for employed radiologists that are subject to the October 2015 IPO restriction deed by September 2020. 4.4 million shares were approved for release by the Board on the 20th of November this year. That's the day after our AGM.

We've importantly continued to leverage technology to improve clinical outcomes and also the patient experience. We trialed an artificial intelligence software product in Western Australia, which worked very well in terms of demonstrating improvement in clinical workflows and patient outcomes.

We also integrated our reporting platforms to allow more subspecialty reporting across the group so we can get second opinions done by the various business units referring work to each other. And we're piloting patient portals and an electronic referral platform as well as a GP messenger and a GP portal. And importantly, we're investing in cybersecurity and did invest over the course of the year in cybersecurity and the protection of patient data.

Very importantly today, and we're excited to announce an agreement to acquire the Imaging Queensland group of companies. And the expected completion of that is on the 1st of November, 2019. We undertook a thorough due diligence process over the course of the past year or so to bring us to the point where we could -- where we have enough companies to sign the agreement and announce it today.

The regulatory review has been positive. Annual indexation for 80% of Medicare Benefits Schedule items for 3 years starting on the 1st of July, 2020, which will be very useful both for us and for the new acquisitions. And we received an upgrade to a full MRI license at the Pindara Private Hospital on the Gold Coast, which will allow us to increase our volumes through that MRI quite significantly.

I'm now shortly going to hand over to Anne Lockwood, our Integral Chief Financial and Commercial Officer who today has been appointed as both the Chief Financial Officer and the Chief Commercial Officer, the CFCO for the group. Anne has done an exemplary job, not just as CFO, but also in bringing this and other acquisitions to bear, corralling teams of advisers and bankers and lawyers and others in comprehensive due diligence exercises.

I'd like to hand over at this point to Integral's new CFCO, Anne Lockwood.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [3]

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Thank you, Ian. I'll turn to Slide 5 to take you all through the details of the main key financial metrics of which we were able to deliver growth to our shareholders in FY '19.

Our operating revenue of $231 million delivered an operating EBITDA of $53 million, a 23% margin. That resulted in an operating NPAT of $25.6 million, up from $18.2 million in the prior year, a 40.7% increase year-on-year. The operating EBITDA of $53 million converted to a free cash flow of $40.4 million. Net of replacement CapEx and we had $11 million of replacement CapEx, we had a free cash flow conversion of $97 million -- 97%.

As Ian said, we will declare a dividend this year of $0.10 per share, which is 25% up on prior year.

At 31 December, we had net debt of $119 million and -- sorry, 30 June, we had net debt of $119 million and a leverage ratio of 2.2x.

Turning to the next page on Slide 6. We've got a reconciliation of our operating to statutory profit. For you and for your more detailed information, we've done that at both the operating NPAT to statutory NPAT as well as the operating EBITDA to statutory EBITDA. We want to ensure we're very transparent on what we are calling out as one-offs.

During the year, focusing on the top table, we've got transaction costs of $1.9 million. We obviously had some run-off costs from New Zealand and our Geelong acquisition. Also we've clearly run a fairly detailed due diligence process this year over IQ and a number of other projects.

We had share-based payment costs relating to the performance rights issues for the senior management group and the Radiologist Loan Funded Share Plan. Our amortization of the customer contracts relates to the purchase price accounting from New Zealand and the recognition of an intangible asset and customer contracts that needs to be amortized in accordance with Australian accounting standards.

We had business development costs which relates to a specialist interventionalist service that we're setting up on the Gold Coast. That cost us at the bottom line a net loss of $400,000 this year. But we're expecting that to break even in FY '20, and that will be captured in our normal results going forward.

We also had of ForEx gain on our New Zealand debt that we converted into equity during the year, and that gave us an $800,000 gain.

Turning to Slide 7 to have a focus on the FY '19 revenue growth; importantly, of our operating revenue growth, up 22.9% to $231 million. That included organic revenue growth of 7.4%, which was higher than the Medicare average in the states in which we operated, which was 6.1%. We had volume growth of 5% again, against an average Medicare of 3.3%. So they are quite strong outcomes for us.

New Zealand contributed 13.4% of our revenue growth, and that was at AUD 25.2 million, and this was in line with our expectations, which was also very pleasing.

Importantly, our average fee per exam, excluding reporting contracts, continued to increase. And that went up by 3.3% in FY '19.

The strong organic growth over our full year was driven by the continued move to the high-end modalities, which is supported by our increase in average fee per exam to CT, MRI, nuclear medicine and PET. We had the new PET service at St John of God Geelong in -- as well as we opened up the Miami Beach Clinic on the Gold Coast, and we had a full year of operations of the specialist spine center on the Gold Coast as well. The full MRI license upgrade in the 1st November 2018 at Pindara Private Hospital on the Gold Coast also helped to deliver our strong organic growth.

Growth in the second half was 6.8% compared to the first half '19 of 8%. We had forecast or advised at the half year report it would come off for the second half, and that was because we had 1 less trading day in the second half compared to prior year, but also the first half of FY '19 had the benefit of a full run rate from new sites and equipment beginning in first half '18.

Turning to Slide 8 and a look at our operating expenditure. Our operating EBITDA margin was 23% across Australia and New Zealand, a very strong margin for both countries. Expenses declined as a percentage of revenue across labor, consumables, equipment and occupancy. And as you all know, that's been the key focus of IDX over the last 24 months.

Our organic operating EBITDA margin was above 20%, in FY '18 it was 20.3%, after some nominal internal management fee charges to New Zealand and charges in line with transfer pricing rules.

As advised at the first half FY '19 results, investment in leading DI technology for future growth and radiologist recruitment and retention did add additional costs, which commenced in the second half of '19, and we did see our margins in the first half of 23.4% come back to 23%.

Turning to Slide 9 and our capital management. Our balance sheet remains strong. Our net debt was $119 million at 30 June, and we had a 2 point times (sic) [2.2x] operating EBITDA leverage margin.

Our average cost of debt was 3.64% under our newly established debt facilities that we signed up in December 2018. Our intangible assets of $202.3 million includes goodwill and brand names. And we've thoroughly tested them for impairment at 30 June, and there were no indicators of impairment, with plenty of headroom in the DCF model. Our net assets increased $33.8 million or 36.2%.

Turning to Slide 10, our cash flow and our cash conversion. We converted operating EBITDA of $53 million after small movements in noncash items and changes in working capital, which was largely due to an increase in receivables from the New Zealand business, which -- and our replacement CapEx of $11 million, which was -- which is quite high this year. We converted to free cash flow of $40.4 million or 76.2%. Net of replacement CapEx, that was 97%.

Turning to Slide 11 and a look at our capital expenditure for the year. We had replacement CapEx of $10.7 million. This is on an accruals basis. The previous slide was a cash basis. And we had growth CapEx of $9.7 million and depreciation of $10.5 million, which I think was in line with what we guided to.

Our major growth CapEx projects in FY '19 related to: the North Melbourne Specialist and Research Centre of $6.2 million; new cardiac CT at St John of God in Geelong of $1.5 million; the completion of the Miami Beach site was $1 million; and we started development of the Peel Specialist Centre in Mandurah.

In FY '20, we are expecting CapEx of approximately $25 million, and that's made up of replacement CapEx of $8 million and growth CapEx of $17 million. We have a number of major projects, and that's outlined in our strategy slide for FY '20 that is driving that growth CapEx of $17 million.

Turning to our market update on Slide 13, which we present to you in all of our statements, just shows the Medicare data and the Medicare statistics. And you'll see that in 2019, the long -- the growth rate was 3.3% compared to the long-term average of 5.4% and 6.1% for benefits compared to the long-term average of 7.2%. As were previously pointed out, we were above those rates and more in line with the long-term average. And I think that's a pleasing outcome and stands behind the business model that we have.

Slide 14. The regulatory environment this year, in an election year, was very busy. As you are all aware from July 1, 2019, the MRI of the prostate was introduced onto the Medicare Benefits Schedule. This was a positive result for patients and referrers, and it has been a good contributor to IDX growth in FY '19, and we expect that to continue.

From November 1, 2018, the MBS removed GP-referred MRIs for over 50. And that's negative, we believe, for patients and for the GPs. However, from a revenue perspective, it's had a minimal impact on IDX. What we found was that GP referrals moved to other less sensitive modalities, and we also saw an increase in MRI specialist referrals.

Of the 50 new MRI licenses issued in FY '19, as we've pointed out, we received a full license upgrade from the partial at Pindara Private Hospital, which was really positive and has worked very well for us. Of the 2 licenses awarded to our competitors in the areas in which we operate of Mandurah and Geelong, both of which were operational in March 2019, to date, we have seen minimal impact, particularly in Geelong. We did have to respond to increase in competition in Mandurah, and we moved to bulk billing reasonably quickly there. And that has seen a return of the volumes and, in fact, an increase in the volumes. And it's resulted really in a minimal impact on revenue but slightly increased pressure on our margins.

Future expected changes, moving to Slide 15. Clearly, the introduction of MBS indexation from July 2020 for 3 years is a great outcome for the industry after 21 years of no indexation, and that was a fabulous outcome as a result of the election. And we expect to see positive return to that for all of the stakeholders in our business, particularly our patients.

Introduction of new MBS codes for breast MRI will come on to the schedule from the 1st of November, 2019. And those item numbers are still to be defined. And as such, we're unable to actually measure what the quantum is, but we expect that to be positive and in line with the prostate MRI.

A key focus of the industry post-election will include digital health, radiologist workforce shortages, implementation of the MBS review findings and indexation of the remaining MBS items for nuc med and MRI. So there's still a lot to do as an industry. As you know, we have achieved indexation. And IDX, along with the industry body, the Australian Diagnostic Imaging Association and our industry counterparts that belong to that association, is still very focused on moving forward and addressing the key issues that, as an industry, we have.

In New Zealand, the key focus of the diagnostic imaging industry in New Zealand is similar to Australia. To date, there has been no material regulatory announcements. And as you're all aware, the annual indexation there is appropriately provided for in all of our contracts.

I'll now pass back to Ian to go through our strategy slides.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [4]

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Thank you very much, Anne. IDX now operates in 5 key markets in financial year '20. You'll see the slide on Page 17 has a new addition, the column on the right side which shows Imaging Queensland. The number of sites has increased by 19 (sic) [18] to bring our total sites to 67 (sic) [66] once we include the Sunshine Coast as well as Rockhampton and Gladstone.

And we have 8 hospital sites in IQ, bringing our total -- the total number of hospital sites to 21 across the group, 26 MRI machines across the group and, importantly, 17 licenses, 13 of which are full. Imaging Queensland has 5 licenses and has use of 5 licenses, including 3 full licenses and 2 partial licenses.

Our number of employed radiologists has increased by 16 to 108. We also have contracted radiologists in addition to the 108 radiologists that are employed. And our group now employs 1,188 people across the company.

In terms of our strategy outlined on Page 18, good medicine is still good business. We're looking to grow our existing business and margin the same ways we have: driving organic growth and efficiency by leveraging the hub-and-spoke model that we have both within the existing business and within the new IQ; to optimize technology solutions and to develop centers of excellence across the group the same ways we have; and medical leadership, evidence-based and medically driven; and we will continue looking for acquisitions that make good sense for us and doing disciplined execution of strategic acquisitions.

We did what we said we would do in financial year '19, outlined on Page 19. We achieved organic growth and efficiency gains. We minimized the impact of the competitor licenses that were issued in places like Mandurah and Geelong. We completed development of the St John of God Hospital, replaced 2 CTs, opened Miami Beach Clinic and are investing in the Peel Health specialist center in Mandurah.

We use digital technology to improve the patient and referrer experience, and this is best evidenced in the FDA- and TGA-cleared artificial intelligence software that I'll speak about a little more in a forthcoming slide. We began implementing a Patient APP and began leveraging the radiologist reporting platform so that we can do subspecialist reporting across the group.

The North Melbourne Specialist and Research Centre was opened in May of 2019. We have a state-of-the-art wide bore 3T MRI there as well as advanced cardiac CT. We're in the middle of the area with the highest concentration of specialists in Victoria, and we think that the North Melbourne Specialist and Prostate Centre -- Specialist and Research Centre co-located with the Australian Prostate Centre should do well. We're projecting it to ramp up over the course of financial year '20.

We implemented new radiologist recruitment, retention and incentive structures, including a broadening of the radiologist shareholder base by 26 radiologists -- 26 additional radiologist shareholders. We developed a new incentive plan for SCR and Lake that has been initiated in the financial year '20. And we have agreed to a full escrow release for employed radiologists by September of 2020, employed radiologists subject to October 2015 IPO restriction deed, which is the SCR and Lake radiologists who would have been with us for 5 or 6 years at that point.

We continue to evaluate further strategic acquisitions and successfully integrated New Zealand and Geelong into the IDX group. Both of those acquisitions are performing in line with our expectations and we could not be happier. We also invested in a very thorough due diligence process for the Imaging Queensland group so that we could execute the share purchase agreement today.

We will continue to monitor and participate and shape the regulatory landscape the way that we have to date. And we think that there are additional changes coming down, as Anne articulated, in terms of breast MRI, as an example, that should have a bit -- a nicely positive impact for us.

In financial year '20, we will capitalize on the extensive investments we have made and will continue to develop our platform to support further growth. We're investing in a new state-of-the-art digital PET at Ramsay's John Flynn Hospital at the southern end of the Gold Coast. So this will bring us to 2 PET machines in the Gold Coast, 1 at the southern end and 1 in Southport. It brings the total number of PETs that we have across the group to 5: 2 in Victoria, 2 in Queensland and 1 in Western Australia.

We will complete the installation of a best-in-class cardiac CT at St John of God in Geelong, install a CT at the Bacchus Marsh Hospital so we can continue -- so we can provide a comprehensive service in that fast-growing regional corridor and we will also use technology like the Philips Compressed SENSE technology which allows us to do post processing so that we can process more patients through an MRI by doing a lot of the processing after the patient has left the machine.

We're going to continue to use digital technology to -- and continue to improve the patient experience, including looking at electronic referral, eReferral, an online appointment technology and patient and doctor portals that will increase ease of access and reliability of service. And we'll continue to invest in security so we can counteract cyber threats and ensure patient privacy.

We're going to ramp up the North Melbourne Specialist and Research Centre by engaging in specialist referrers in the medical precinct around the Royal Melbourne Hospital where we're located.

And we'll invest in the recruitment and retention of highly skilled radiologists, clinical and administrative staff where we're going to continue to promote IDX's values of patient first, medical leadership, everyone counts, embrace change and create value.

We'll integrate our acquisitions and evaluate further acquisitions in line with our strategy. We will complete and integrate the IQ acquisition into the IDX Group, and we'll continue to evaluate potential acquisitions in line with this strategy.

We will also continue to develop key relationships with governments and industry players and work closely with the ADIA to shape development of the industry going forward.

I'd like to just highlight on Page 23 something that we're very proud about in artificial intelligence in that we were the first to market in Australia an FDA- and TGA-approved artificial intelligence software developed by a company called Aidoc that improves clinical workflows and ensures better patient outcomes.

What the system does is it analyzes CT images and then prioritizes our patient list to ensure that the most critical patients are diagnosed so that they can be treated first. The AI applications expedite the diagnosis and treatment of several head, neck and chest conditions, and it provides us with peace of mind for referrers, patients, radiologists and even for ourselves, that there are no -- that none of these life-threatening conditions are sitting on a list waiting to be reported because what it does is it looks at every one of the head and neck or chest CTs coming in to look for the algorithms that have been embedded into the system that looks for intracranial hemorrhages, bleeds inside the brain, cervical spine fractures and pulmonary emboli. And it identifies these and flags them and moves this patient to the top of the worklist so that radiologists can see these and report these first so that treatment can be implemented quicker.

We analyzed over 5,000 studies using the algorithm, and we picked up 400 acute head, spine and PE studies that were flagged. Our sensitivity rate was in the region of 99%. The specificity was a lot lower, about 60% or 70%. But these AI programs learn on themselves and get better and better as time goes on. The important thing is that because the sensitivity is so high, it gives the radiologist comfort that there's another pair of eyes that has looked at the scan before they have. And there's an icon that appears at the bottom of the screen that gives them sufficient comfort that from the evidence in this small pilot that was done, we can see that the radiologists are moving through these patients quicker than they had previously. It's also far better for the patient because there have been instances where the software has picked up some of these things before we've had a chance for the radiologists to see them. So AI has arrived and it's here to stay, and it will materially improve patient care and service well into the future.

I'm going to ask Anne just to briefly outline for us the impact of AASB 16 leases from 1 July 2019.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [5]

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We just thought Slide 24 was important for us to outline the potential impacts of this on our FY 2020 results, this new accounting standard. Importantly, net cash flows will remain unchanged as a result of this. It doesn't change the cash flows at all. What it will do on the balance sheet is we will recognize the right-of-use assets of between $48 million to $52 million and a corresponding recognition of a lease liability, with the net impact going to retained earnings as part of the first-time adoption rules.

In the profit and loss, our NPAT will decline, we suspect, by under $500,000. And our EBITDA will increase by $8 million to $11 million. That's because the operating lease payments or the rent payments that are currently going through occupancy expense will now come below the line, EBITDA line, and be treated as depreciation and interest.

As I've said, the cash flows will remain unchanged and -- but there will just be a reallocation from operating to finance cash flows. We will present our results for FY '20 reflecting current practice as well as the impact of the new standard, so it's very clear going forward that we thought it was important to give you all a heads-up.

I'll now pass back to Ian to take us through the second investor presentation around the acquisition and the entitlement offer.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [6]

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Thank you very much, Anne. We are excited this morning to be able to announce the acquisition of the Imaging Queensland group of companies based in major centers along the fast-growing Sunshine Coast and in Rockhampton and Gladstone.

Imaging Queensland, or IQ, delivered in financial year '19 a pro forma EBITDA of $11.9 million. It comprises 18 high-quality sites under 3 main brands. It also includes an experienced team of 16 radiologists who have all been with the company for a long -- for a lengthy period of time and a total of 270 total employees. And the focus of the IQ Group, similar to ours -- similar to the focus of our group, is on diagnostic excellence.

The strategic rationale for the acquisition is clear: it's a high-quality footprint in a growing region where we don't currently operate. It provides radiology services at 8 hospitals, and it holds 5 MRI licenses, 3 full licenses and 2 partial licenses. It includes centers of excellence around women's imaging and around pain management.

There's a very strong cultural and clinical fit with Integral Diagnostics. It meets our investment criteria. A lot of the doctors -- several of the doctors trained with doctors at South Coast Radiology, one of the businesses within the Integral Diagnostics group. And there are several growth initiatives underway, which includes both new sites as well as relocated sites that have good potential for improving the mix towards the higher-value modalities like MRI and CT. And the financial metrics are attractive.

I'm going to ask Anne at this point if Anne can go through the structure of the acquisition, the funding and the timings and the conditions for acquisition.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [7]

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Okay. Thanks, Ian. I'm on Slide 7, the acquisition summary section. The consideration for the Imaging Queensland group is made up of a $96 million upfront payment based off FY '19 EBITDA of $11.9 million. In addition to the $96 million, we will also be paying an additional payment upfront of $8.1 million for Imaging Queensland recent and proposed CapEx relating to their growth sites that had substantial amount of investment this year. And there's a number of sites that are in a growing phase and new pieces of equipment, and that has driven that additional payment of $8.1 million. The total upfront consideration of $104 million is split at 70% in cash and 30% in escrowed new ordinary shares of IDX.

Linked to the upfront payment, there's 2 distinct earnout payments. The first one is Earn Out A, and that is based on results in calendar year FY '20. There is a hurdle EBITDA that needs to be achieved of $12.9 million for Earn Out A to kick in on the full calendar year. We will pay a multiple of 8x on EBITDA earned over and above the $12.9 million. Of this earnout, we will deduct the value of the growth CapEx paid up front, which was the $8.1 million. Earn Out A payment will also be payable in 70% cash and 30% of escrowed IDX shares.

Earn Out B is based on growth CAGR and will be paid out over calendar year '21 to '24. Growth CAGR will be based on what is achieved in calendar year '20, and which Earn Out A is based on, and that CAGR growth hits in at 5% and up to 10% CAGR growth, with anything over 10% being paid -- CAGR growth being paid out as 20% of anything over the 10%. We expect the aggregate earnout payments to be approximately $12 million and that will be spread evenly between Earn Out A and Earn Out B.

Turning to the funding on Slide 8. The upfront consideration will be funded by the entitlement offer that we -- or partly funded by the entitlement offer that we have announced today of $72 million. The offer is offered at $2.71 per share, and that represents an 11% discount to the dividend-adjusted TERP. The new IDX shares also will be issued to the IQ vendors at $2.71, so the 30% consideration will be issued at the discounted rate to the IQ vendors. The balance will be funded by our existing bank funding of $12.1 million, and we have had approval for that and for the acquisition for the funds -- the bankers in our club facility.

Post the entitlement offer and post settlement of the acquisition, we expect net debt against our FY '19 pro forma adjusted EBITDA to be in the order of 1.9x, so bringing it under the 2x of our historical EBITDA. This provides IDX with additional balance sheet flexibility to support continued investment in organic and inorganic growth initiatives, which we'll continue to look at.

The IDX shares issued as part of the consideration for the acquisition will be subject to escrow arrangements for a period of 5 years, in line with our New Zealand acquisition. The new shares issued under the entitlement offer and as part of the scrip consideration will be issued after the dividend record date and, as such, will not be entitled to the FY '19 final dividend of $0.05 per share that we have -- we have just announced.

The completion of the acquisition is expected in November 2019 and is subject to usual conditions precedent, including: the extension, renewal and novation of some material contracts; consents to changes to control over those contracts; a new employment agreement that has the terms and conditions, which have been agreed, but do need to be signed by the key IQ radiologists, both vendor and nonvendor; and no material adverse change in IQ.

If for some reason, which we certainly don't expect, that the acquisition does not complete, IDX will either return the entitlement offer proceeds or keep them in reserve for other acquisitions and/or pay down debt.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [8]

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Thank you very much, Anne. Imaging Queensland was established in 2007. The group comprises of 18 clinics, 6 of which are on the Sunshine Coast; 2 are in Central Queensland; and 2 are in Moreton Bay.

Importantly, the group is the largest diagnostic imaging provider on the fast-growing Sunshine Coast. It offers a range of imaging services, including MRI, CT and nuclear medicine. It has 16 well-regarded radiologists within the group who are staying with the company. And it provides radiology services for Central Queensland, the Central Queensland Hospital and Health Services hospital as well as for Ramsay Hospitals on the Sunshine Coast and in Central Queensland. The group has 6 MRIs and 14 CTs.

Moving to Page 10. Some of the investment highlights that attracted us to Imaging Queensland is the attractive footprint in an area where IDX does not currently operate but shares a lot of similarities with the areas where we do operate and where we do very well, areas like the fast-growing Gold Coast, the western suburbs of Melbourne and Western Victoria, Southwest Western Australia as well as South Auckland, all have similar demographics of fast-growing populations, particularly fast-growing elderly populations, which is our core market.

IQ provides radiology services at hospitals that are owned and operated by Queensland Health via CQHHS and have 3 hospitals that are owned and operated by Ramsay.

The group has 6 MRIs, 5 of which have licenses, 1 of which was a new license at Gladstone that was issued in the most recent round of licenses recently issued by the Department of Health.

There's a very strong cultural fit amongst the group because they trained together with several of our radiologists in South Coast Radiology. And similarly, their focus is on the high end, the nuclear medicine and the MRI end of the spectrum as opposed to the basic x-ray and ultrasound GP market. We service hospitals and specialist markets in a similar fashion to IQ as well as important GP markets who still comprise the bulk of referrals for both entities.

The financial metrics are attractive. What this acquisition does, the acquisition together with the capital raise, it does move our leverage back down to under 2 after the capital raise, which is important for us in order to give us the ability and the flexibility to make additional acquisitions that we believe would make good sense for us.

Moving to Page 11. There's a strong cultural fit with a focus on clinical experience. And what we've highlighted here is the 2 leading radiologists within the group, the Managing Director and Founder of the group, Dr. Siavash Es'haghi. Dr. Es'haghi has also been the President of the ADIA for the past few years, and we've come to know Siavash very well through our interactions with the ADIA. And that was what prompted the view of both companies to start to get to know each other and learn more about each other and come together in a closer and closer fashion. Similarly, Dr. Geoffrey Clark, Geoff runs the Central Queensland Region 4 Imaging Queensland and also an outstanding, well-trained radiologist who is very well known to radiologists within our group and trained together with several radiologists within our group on the Gold Coast in Southeast Queensland.

Moving to Page 12. The acquisition is a strategically compelling acquisition. The population of the Sunshine Coast is growing. Particularly the elderly population is growing at a far higher rate than the elderly population in the rest of the country. In fact, if you look at the population age above the age of 50, there's 40% in the Sunshine Coast versus 34% in the rest of the country, growing at 5.2% in the Sunshine Coast versus a growth rate for the 80-plus population of 4.1% in the rest of Australia. The median age is also obviously higher in the Sunshine Coast, which fits in well with the kind of services that we provide.

Our licensed MRIs are -- at important sites like the SCUPH site, which is the Sunshine Coast University Private Hospital, which is a Ramsay-owned hospital right next to the large public hospital in the Sunshine Coast, and we have 1 of our fully licensed MRIs on that site. We also have a fully licensed MRI in Rockhampton as well as a partial licensed MRI in Rockhampton, a full license down in Gladstone and we have a partial license on the Sunshine Coast as well.

The Group satisfies IDX investment criteria quite nicely. In fact, if you look at their revenue growth profile the last year, they've grown at about 6.1% in terms of the growth from financial '18 to '19. But the future growth avenues are just as exciting for us both by leveraging the network effect that they have, the hub-and-spoke that they have similar to what we do within our group in areas where we are the largest provider in a region that does provide us with the benefit of having those network effects where referrers get used to using you, so they use you more. They know it's convenient for the patient to use you because you've got clinics nearby, you're the largest provider in the area. And ultimately, you get to the point where you're the only asset they have open on their desktop, and you're the first point of referral for them. And especially when they know that you provide a comprehensive service, everything from a basic x-ray through to an ultrasound, CT, MRI or nuclear medicine, then they don't need to think twice when the referrers refer into you, and it does work very well. It's a virtuous referral cycle which works nicely that has worked nicely for us where we do ensure that we are one of the top 2 providers in each area that we do service and similarly, with the Imaging Queensland Group, who are in the same position.

Our integration plan is laid out in Slide 14. First and foremost, we're going to minimize disruption to their current operations. We're going to ensure that we retain the key people, the best of both businesses. We're going to ensure that the clear lines of leadership and communication are in place and that there's a clear and demonstrable path to optimizing the benefits from the combined group.

And we'll also look at extracting synergies of which there are several, but they have not been included to date in our -- looking at our accretion metrics to date. We see these synergies as coming about over and above.

As briefly articulated in the last presentation, in Slide 15, you'll see the difference that Imaging Queensland does make to the rest of the group. By adding the Sunshine Coast, Rockhampton and Gladstone, we do increase the size of the group quite materially.

I'll now hand it over to Anne now to take us through the entitlement offer before we open the floor to questions -- in fact, what we'll do on the entitlement offer is we'll open the floor to questions at this point since the hard points of the entitlement offer have already been reviewed by Anne.

So we'll open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matthew Nicholas with Crédit Suisse.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [2]

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Just first on the acquired business, I think you made a comment in there about contract renewals and so forth. Could we just get a bit of profile as to the mix between, I suppose, community external clinics and hospital contracts here and the materiality of contracts that are coming up for renewal in that business?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [3]

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Sure. Thanks, Matt. The important contracts for us are contracts with CQHHS and some of the Ramsay contracts. Those contracts are important to the business. They're not nearly as large as the stand-alone clinics are in terms of materiality, but they're all material contracts. I mean the CQHHS contract is a contract that's as important to us as our Western Australian Country Health Services contract that we have in Western Australia right now. It's the service that we provide not just to the largest client, the Rockhampton Hospital, but also to other hospitals across Central Queensland.

Now we haven't shared direct numbers on -- with regard to each of these contracts yet, but suffice to say that they are important contracts, and there will be conditions precedent to getting the deal done.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [4]

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And I suppose just on that same thematic, I mean it feels like there's a material amount of radiologists coming across as part of the transaction, and they all appear to be incentivized and locked in. Are there any radiologists within the group right now that won't come across as part of the deal? And are they material to the overall business?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [5]

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No, we don't think so. So Anne and I spent the weekend now meeting with 9 vendor radiologists who we obviously were not be able to communicate with beforehand. The 8 vendor radiologists are obviously coming over, and they're committed for a period of at least 5 years. We spoke with several of the nonvendor radiologists over the weekend, and we have obtained sufficient comfort from the nonvendor radiologists that they will be staying with the group. They are important to the group, and we believe that the current arrangements that they have in place are strong enough for them to stay. And we've added some additional benefits that being part of a larger group does bring to them: like, for example, over time, the ability to participate in the radiologist share plan -- loan share plan.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [6]

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Sure. And just lastly on the acquisition. I notice that there hasn't been a synergy number given there. I mean there is a small geographic overlap it seems, but not materially much. Does the $11.9 million that has been provided as part of the acquisition case, does that include the target's corporate costs there? Or is that ex corporate costs?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [7]

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That includes their corporate costs, Matt. And as you know, with the integrations, we like to take a slow and a softly, softly approach. And we will be doing that here. We do expect synergies just overlaying our cost structure and the leverage we get from our size, but we're not calling them out specifically, but we certainly expect there to be additional benefits from those synergies.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [8]

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Sure. And just the final one for me. Just in terms of the core business, I noticed there wasn't an outlook or an exclusive outlook statement as to your expectation to the core business. Would it be too simplistic to say you see broadly similar revenue growth in that core business continuing to '20, with a bit of cost pressure, I suppose, coming through from the new renegotiation of some of those radiology contracts? Would that be a prudent way to look at FY '20?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [9]

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I think that's a fair summary, Matt.

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Operator [10]

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Your next question comes from William Macdiarmid with Ord Minnett.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [11]

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Congratulations on the acquisition. Just on Slide 13, I think it was, you've got the revenue growth profile for FY '18, FY '19 and the comment that it reflects the partial run rate. Can you just explain that a little bit more clearly? Is that you have the full run rate from the growth initiatives in FY '19, so the organic growth is actually quite bit lower?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [12]

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Yes. Thanks, Will, that's a good question. What that shows is there is a built-in of full year run rate for the new growth sites based on what they were doing in the ramp-up phase. So it's a little bit 2-pronged that there's some within that FY '19 number and there's further expected ramp-up and full run rate revenue expected into FY '20.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [13]

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Okay. Great. So are you able to outline sort of what the organic revenue growth has been for the business the last couple of years, Anne?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [14]

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It's been in line with that sort of 6% to 7% organic revenue growth, and it's -- and which is very similar to the revenue profile growth that we have seen across our other businesses, particularly in -- on HCR on the Gold Coast.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [15]

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Okay. Great. You mentioned a couple of growth initiatives in previous slides. Can you just expand a little bit on what they are for this group?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [16]

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I guess there are both new sites that the group has developed recently, and the group has also relocated sites that were not previously doing as well as what they will be doing going forward. Probably the single most important growth avenue for the group is the full licensed MRI that they've just received in Gladstone. So the MRI in Gladstone did not previously have a license. They now have full license there going forward. And that MRI's already picked up and is busy. They've also been relocation of some of the clinics along the Sunshine Coast to areas that are more attractive, higher growth areas.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [17]

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Okay. No problems. In terms of the core business, are you able to just sort of segment the $17 million of CapEx and growth CapEx that you expect to spend, timing and maybe even sort of return hurdles on those activities?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [18]

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Sorry, Will, you wanted the...

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [19]

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Sorry. Just to segment a little bit there where the CapEx for FY '20 in the core business is going to be spent, the timing of that and then maybe just the -- your return hurdles?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [20]

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Sure. Okay. So on slide -- I'm just going through the strategy slides for FY '20, Slide 21, on the capitalized on capital investments to drive organic growth, we've listed out a list of projects there. So that's the John Flynn Private Hospital, including the new PET facility. That takes up a large chunk of that $17 million in the order of sort of $7 million to $8 million. We've got a second CT as it has gone in at Pindara. We've put in a cardiac CT in St John of God Geelong Hospital, a CT at Bacchus Marsh Hospital in Victoria, and we're doing a major refurb of the MRI in Ballarat. We're co-locating them into 1 hospital at St John of God. And then we've got a redevelopment of the Peel health center in Mandurah, and we're installing and investing in Compressed SENSE technology in New Zealand. So there are some fairly chunky projects that make up that $17 million.

In terms of the expected return on invested capital, as we've explained previously, where we do have return metrics and return hurdles on all of our business cases, all of those investments have gone through our business case assessment process. They've got various returns associated with them, but they're all absolutely projected to be EPS positive and have reasonable NPVs and internal rates of return. Our ROIC at the moment based on an EBIT is sitting at around 16% to 17%, and that's a key hurdle that all of our business case investment metrics need to be over.

What we will find in FY '21 because of these significant investments, we're going to have some downtime at John Flynn on the Gold Coast and also at Ballarat Base Hospital. We're significantly ramping up the North Melbourne Specialist Centre. So there will be some margin drag in FY '20. IQ, being an Australian-based business, will also slightly bring that margin down as well. But these are all really solid investments that set us up for FY '21 when indexation comes in, and we absolutely expect to see positive returns from all of these going forward.

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Operator [21]

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Your next question comes from Steve Wheen with Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [22]

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Just a clarification on that CapEx. So the growth CapEx that you've included in your, I guess, base business, that doesn't include the CapEx payments that you're making for IQ, just the delta increase in growth CapEx looks like there's a similar sort of quantum.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [23]

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Yes. No, you're right, Steve, it doesn't. The $17 million that we're calling out of FY '20 CapEx relates solely to our existing business. The $8 million growth CapEx for IQ is money that they've already spent in developing new sites and investing in new equipment.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [24]

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Yes. And are you happy with how they've spent that? I mean do they follow sort of similar types of return hurdles as what you would have done if you were making that decision?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [25]

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We've certainly assessed all of that as part of our due diligence. We've visited all those sites. We've really dug down to a site-by-site level, and we've seen the investments. We've spent a considerable amount of time with the vendors and understanding that. And we have come to the conclusion that we're very confident about that growth CapEx. It resulted in the way we structured the deal.

We were encouraging to the vendors to spend that money because we didn't want to slow down the opportunities of what that business had in terms of growth. And we think, both us and the vendors, will be able to benefit from that more rapidly than we would have had they waited to do that growth CapEx until after we've acquired them.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [26]

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Yes, that's clear. I -- also just with regards to the new business that you bought, the hospital contracts, what are the terms of those contracts? When do they -- when are some of them up for renewal?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [27]

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Yes. We don't share information, Steve, on specific hospital contracts. We don't do that for the new group or for our existing group just because it's competitive information.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [28]

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Okay. But can you then on average give us an indication as to maybe when one of them -- you don't have to name it, but when some of them might be up for renewal? I'm just trying to get an indication as to the potential maturity of some of them.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [29]

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Steve, just to be clear, most of the average profile of hospital contracts will roll over in a 5- to 10-year period. And to be clear, the contracts and the signing of those contracts, those hospital contracts, are conditions precedent to the deal.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [30]

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Yes. Okay. Great. On the -- in terms of the acquisition summary, there's some footnotes, which I just wanted to get some clarification from you as to what it actually meant. In terms of the acquisition, they're accretive on a pro forma basis before and after a bonus element of the entitlement offer, just a little explanation behind that?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [31]

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Yes. So that's the Australian accounting standards again that basically require you -- when you account for your earnings per share, you've got to take into account the dilutive effect of the basically bonus shares that you've given away because of the discount upfronts that we've given. So the shares being issued at $2.71, there's a bonus element to that, and the accounting standards require us to measure the number of bonus shares that have been given as part of that discount and take that into account when determining our EPS accretion.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [32]

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Can you quantify the bonus shares so we can make the same calculation?

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [33]

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I don't know that off the top of my head, but I think we have said -- we've stated that it's 1.02x.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [34]

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Okay. Great. And finally, just wanted to get an idea, you mentioned that you've been able to protect yourself in certain areas where there's been new MRI licenses awarded. I just wondered if you could give some color around what you're seeing happening around Geelong in your existing business just given the competitive nature of that market.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [35]

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Yes. Geelong, we've seen no impact to date from the license that has been granted to Epworth on the other side of Geelong. So we've not needed to change our pricing or our offering in the market. In Mandurah though, where we did see the beginning of a competitive impact from the licenses that were granted, we did -- we have reduced our pricing to ensure that we're competitive in the market, and our volumes have remained strong. It's obviously affected our margins but not our volumes.

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Operator [36]

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Your next question comes from Davin Thillainathan with Evans & Partners.

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Davin Thillainathan, Evans & Partners Pty. Ltd., Research Division - Research Analyst [37]

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Just a couple for me. Perhaps on the IQ acquisition to begin with, could you just talk to how IQ's case mix is positioned ahead of the government funding changes that have come through? I did notice that they're particularly leveraged to women's imaging, for instance.

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Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [38]

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Yes. They've got a fairly similar case mix profile to us, as you would expect, given the number of similarities between our business with hospital contracts, number of MRIs and CTs. So they don't have a PET in the business, so that brings that off, but they certainly do practice nuclear medicine. So their case profile is very good.

On the Sunshine Coast, in particular, they have a very high presence and high-profile doctors within women's imaging, and we think that is a real positive and adding real benefit to the community there and adding a lot of goodwill to the brand and to the business of IQ. And we're highly supportive of that service that they offer.

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Davin Thillainathan, Evans & Partners Pty. Ltd., Research Division - Research Analyst [39]

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Very good. And on the Prostate Cancer Centre, I know it's early days, it's about 3 months in, could you just talk to the initial experience there, particularly the volumes? Has it gone in line with expectations?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [40]

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Yes, they're pretty much in line with expectations. We're not seeing any major differences. We've been very happy with how the new financial year has begun.

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Davin Thillainathan, Evans & Partners Pty. Ltd., Research Division - Research Analyst [41]

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Yes. And I think there was also the potential that you could relocate some existing MRI licenses at that particular center. Is that still a consideration on your end?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [42]

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Well, we don't know. We know that the department is getting a little more difficult around the ability to relocate licenses even within the same state, but we will continue to lobby for licenses where we think that a license makes sense for the patient population that we serve. And we will, if necessary, offer to move existing licenses from areas where they do not have as much volume as what they could get in an area like North Melbourne where we service a very important oncology market.

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Davin Thillainathan, Evans & Partners Pty. Ltd., Research Division - Research Analyst [43]

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Very good. And just finally for me, clearly, you've moved through incorporating Aidoc in WA after the trial. Could you just talk to the initial results in the trial and the key reasoning to move ahead with that, please?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [44]

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Yes, it's been -- it has really served us well. It's been a terrific success, the trial that we have implemented, both in terms of patient care and quality in that it's picking up small intracranial hemorrhages, some of which were missed by radiologists on an initial round. Important diagnosis for the patient is something that you do not ever want to miss. The sensitivity rate of the Aidoc applications are very, very high. They're in the region of 99%. The productivity improvement that we've seen, even though the study is fairly small to date, have been compelling. We've seen the productivity improvement, in other words, radiologists spending less time on scans where the Aidoc icon appears in the bottom right part of the scan. We're seeing them spend far less time on those scans, to the extent of about 20%, 25% less time on those scans than they would otherwise be or previously spending on those scans.

But very importantly for us, Davin, is that we know at any time that there's not important diagnoses like an intracranial bleed or a cervical spine fracture waiting in the worklist that has not yet been reported because these diagnoses, once they're highlighted by artificial intelligence, get moved up right at the top of the worklist so that the radiologist sees them and acts on them first. So that stuff, from a patient care point of view, it's working very well. But also from a productivity point of view, we think it's going to make a material difference over the course of the next few years.

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Operator [45]

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There are no further questions at this time. I'll now hand back to Dr. Kadish for closing remarks.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [46]

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Thank you all very much for calling in. Our time is up. We're a few minutes over, in fact, but we will be meeting with many investors over the course of the next week or so and we've also put contact details onto our presentation if you do need more information or would like to speak to -- or more information from Anne or myself.

We're very excited with the Imaging Queensland acquisition. The bringing of the 2 businesses together opens up tremendous opportunities for both businesses. And we're really excited and looking forward to financial year '20 and the future.

So thank you all very much for calling in, much appreciate it.