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Edited Transcript of IDX.AX earnings conference call or presentation 23-Aug-18 1:00am GMT

Preliminary Q4 2018 Integral Diagnostics Ltd Earnings Call

Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Integral Diagnostics Ltd earnings conference call or presentation Thursday, August 23, 2018 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anne Lockwood

Integral Diagnostics Limited - CFO

* Ian Kadish

Integral Diagnostics Limited - CEO, MD & Director

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Conference Call Participants

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* Gretel Janu

Crédit Suisse AG, Research Division - Research Analyst

* Shuo Yang

Microequities Ltd. - Senior Investment Analyst

* Simon Conn

Investors Mutual Limited - Senior Portfolio Manager

* Steven David Wheen

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

* Vanessa Thomson

CLSA Limited, Research Division - 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 FY '18 Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions)

I would now like to hand the conference over to Dr. Ian Kadish, MD and CEO. Please go ahead.

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

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Thank you very much, Cailey, and good morning, everyone. It's great to be here and to report back on what has been a really good year for IDX. My name is Ian Kadish. I'm the Managing Director and Chief Executive Officer of Integral Diagnostics. I'm here this morning on the call with Anne Lockwood, our Chief Financial Officer. And it's both our pleasure and our privilege to talk to you today about a year where we have grown our bottom line, our net operating profit after tax by 20.5% and have grown our earnings per share by a similar amount.

We have improved our operating EBITDA margin to 20.1%, which is an industry-leading margin. In financial year '17, we were at 18.6%. We declared a fully franked final dividend of $0.04 a share, bringing our total FY '18 dividends to $0.08 a share. In financial year '17, we were at $0.07 a share.

We've created new centers of excellence. We've enhanced hospital sites. And we've procured new best-in-class technologies, including a new picture archiving and communication system at South Coast Radiology in Queensland, the largest business within our group.

We've completed major acquisitions of high margin, high growth businesses with leading Australian and New Zealand radiologists in both Auckland, New Zealand and in Geelong, Victoria.

And we've diversified our revenue stream even further. We've -- after the New Zealand acquisition, Medicare reimbursement will comprise less than half of the group's revenue. Importantly, we also defended an unsolicited takeover bid, a bid that was not in the best interests of IDX shareholders. So we've established a platform for strong and sustainable growth.

I'm going to hand over now to Anne Lockwood, our Chief Financial Officer, who will take us through the financial numbers.

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Anne Lockwood, Integral Diagnostics Limited - CFO [3]

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Thank you, Ian. Turning to Slide 4, our key highlights for FY '18. The results delivered an industry-leading operating margin of 20.1%, and we're up across all of our key financial metrics.

In FY '18, we delivered operating revenue of $198.1 million, driving operating EBITDA of $38.1 million and an operating impact of $18.2 million up from -- by 20.5% from the prior year. Our operating EPS was $0.126 compared to $0.104 in the prior year, a significant improvement. And whilst our statutory NPAT of $15.1 million was slightly down, prior to the takeover response costs, our statutory NPAT was up by 8.4% at $16.8 million. Our free cash flow is strong at $30.7 million, delivering a conversion rate of 80.6%. Our net debt at 30 June '18 was $44.9 million with a leverage ratio of 1.2x and an equity balance of $93.4 million.

Turning to Slide 5. We thought it was important to show a reconciliation of our operating result to our statutory profit result, highlighting the transaction costs of $1.4 million net of tax and a takeover response costs of $1.7 million net of tax. Importantly, we also wanted to be clear that these one-off costs do not include any internal costs that would have otherwise been incurred in operations. Our operating result is a very clean number.

Turning to Slide 6, on our profit and loss. Our strong [proprietal] financial performance was driven by solid organic growth and realization of significant cost efficiencies across the business. As I said, operating EBITDA of $38.1 million drove operating EBIT of $28.5 million, showing that we really control depreciation costs and we had no movement in our net finance costs. Depreciation and finance costs are important for us to focus on. We're an asset-heavy business. There is a significant cost in our business, and our ability to control these costs draw to what we deliver at the operating impact line. Controlling these costs and the strong financial performance despite incurring our necessary takeover response costs allows us to deliver an FY '18 final dividend of $0.04 per share, fully franked. This will be paid on the 4th of October 2019 and brings the full year FY '18 dividend to $0.08 per share compared to $0.07 per share in FY '17.

Turning to Slide 7 and focusing on revenue. Our solid organic growth was driven by IDX's strong hub and spoke model. Operating revenue was up 5.9% to $198.1 million and volume growth of 6.7%. Organic growth was delivered across all business units and operating region. Volume growth was in excess of Medicare in the sites in which we operate.

We had significant new management initiatives implemented from July to October, which included restructuring the call centers in Queensland and Western Australia, which significantly improved access of our patients and referrers into our business. We had focused marketing initiatives, and we really utilize best practice market initiatives across the whole of the business.

Our growth was sustained from -- in the second half, but it was impacted in the second half by the Commonwealth Games on the Gold Coast in April 2018.

Importantly, our average fee per exam, excluding reporting contracts, continued to increase. It shows a continued move towards higher-end modality and specialized radiology services.

Moving to Slide 8 and our operating expense chart. In FY '18, we realized significant cost efficiencies across the business, allowing us to deliver an industry-leading margin of 20.1%. This is compared to 18.6% in FY '17. Importantly, the improved margin delivered $2.85 million additional to the EBITDA line. The expense growth declined as a percentage of revenue through the real focus of management from the start of the year. Our LIBOR costs declined as a percentage of revenue, reflecting our approach to flexing LIBOR to demand.

Our consumables were down 2% for the year despite our volumes being up by 6.7%, and this is a fantastic example of the success of our vendor supply audit and our efficiency initiatives. Occupancy and service costs also declined as a percentage of revenue, and we expect to deliver further savings and further initiatives as we continue to roll out our vendor supply audit and our focus will be on our equipment and service costs in FY '19.

Moving to Slide 9 and looking at our capital management and our balance sheet. FY '18, our net debt is $44.9 million. As you're all aware, we did execute on acquisitions on the 2nd of July, and we drew down an additional $75 million of debt to execute on these acquisitions, and this does take our gearing to approximately 2.2x post-acquisition. And it will slightly increase our cost of debt, but we expect to maintain the cost of debt at or slightly below 4%.

Other important areas in the balance sheet is our intangible assets of $103.6 million have been fully tested for impairment, and we have plenty of headroom within our impairment testing. Our provisions increased by $800,000 from FY '17, reflecting increased employee provisions and the increased number of sites, showing that we have robust straight-line lease accounting and make good provisions and a fully full balance sheet.

Moving to Slide 10, our cash flow and cash conversion. Our strong business performance was reflected in our cash conversion and our free cash flow growth. Operating EBITDA of $38.1 million delivered free cash flow of $30.7 million at a conversion of 80.6%. If we remove or took out the impact of the replacement capital expenditure, we'd actually have conversion of 104%.

Moving to Slide 11. Lastly, for the finances on capital expenditure. Management and radiologists' collaborative focus on smart CapEx spending drove our CapEx spending down from what we'd originally forecast in FY '18. Our replacement CapEx was $8.8 million, originally forecast at $11 million, a saving of $2.2 million. And this was due to leveraging our prior economies of scale and strategically collaborating with the radiologists to ensure we had fit for purpose selection of equipment and technology.

Growth CapEx of $5.2 million was largely spent on the Spine Centre of Excellence in Southport and most importantly; a major refurbishment of the St John of God hospital in Geelong; and the addition of the first and only private PET facility in Geelong, showing IDX's commitment to leading-class technology in the regions in which we operate.

I'll now hand over to Ian to take us through the rest of the presentation.

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

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Thank you very much, Anne. Industry growth in both Australia and in New Zealand is supported by very favorable demographics, an aging population, an increased prevalence of chronic disease and also advancements in technology for early diagnosis and treat -- and screening. Importantly, MBS indexation will be reintroduced for targeted diagnostic imaging services from July 2020. Interestingly, New Zealand already has annual indexation in place in that there is an increase each year at about CPI from most of the major payers.

The regulatory environment in both countries is generally positive. Consultation items were indexed on the Medicare Benefits Schedule as of the 1st of July this year. And importantly for us and for our patients, the MRI of the prostate was also introduced onto the Medicare Benefits Schedule on the 1st of July. MRI of the prostate provides noninvasive evaluation of the prostate for those at risk of this common cancer in Australian men. It allows for early detection and also enables earlier treatment, thereby improving outcomes and reducing costs.

On the 1st of November, however, the GP-referred MRI of the knee for patients over the age of 50 is likely to be removed from the Medicare Benefits Schedule, and this will restrict the ability for GPs to accurately diagnose knee conditions. It will almost certainly also increase specialists' referral costs. We're not happy about the removal of this from the Medicare Benefits Schedule, but the impact of this is more than compensated by the very positive change for -- by including MRI of the prostate.

In addition, new breast tomosynthesis items will be made available for a temporary period on the MBS from November this year, while a permanent listing is considered by MSAC. Similar to MRI of the prostate, this is also a positive change for our patients and for us as a company. It allows earlier and better detection and treatment, improves outcomes and reduces costs.

We do expect a reintroduction of MBS indexation for selected diagnostic imaging services from July of 2020, and we would welcome that. And importantly, in New Zealand, the Accident Compensation Corporation and Southern Cross Healthcare, our 2 largest payers, have recently finalized and confirmed new contracts with us.

Moving to IDX strategy. Management's financial year '18 strategy, good medicine is good business, is laid out on Page 16. We have successfully reduced labor costs by flexing our staffing a lot closer to patient demand. We have increased capacity utilization significantly for MRI, PET and CT, improving efficiencies and improving throughput through these expensive, expensive modalities. We are a workplace of choice for our radiologists and our staff, and we're a market leader in each territory where we operate. We executed a bolt-on acquisition in Geelong, the acquisition of the 2 clinics of Geelong Medical Imaging, a comprehensive business that includes x-ray and nuclear medicine and MRI, and that acquisition was completed on the 2nd of July 2018 on the same day that we completed the acquisitions of the 3 businesses that we acquired in New Zealand. The New Zealand businesses are a new area for us, a new territory, but they are leading businesses in a fast-growing market, a market that is growing by virtue of the favorable demographics that we're experiencing elsewhere in Australia, but also by virtue of the fact that we do get indexation there and have aligned ourselves with very well-regarded radiologists, leaders in their fields, in musculoskeletal medicines and in neurovascular medicine.

So we did what we said we were going to do. We've laid out some of these -- some of the highlights of the year on Page 17 in terms of medical leadership. Our clinical leadership committees are involved in both operational as well as the strategic decisions that we make as a business. We have progressed the review of radiologist recruitment, retention, incentive and escrow arrangements. And we've successfully defended the unsolicited bid, a bid that was not in the best interest of IDX shareholders.

We flexed staff to demand using smart scheduling and automated roster management. And we also now have visibility of not just daily revenue but daily cost information that allows us to flex costs in real time.

We've increased capacity utilization quite significantly and materially through upgrading our phone systems, our call centers and our IT platforms. This does include service and utilization levels and capacity utilization, and it has facilitated patient triage in areas where we have several clinics in close proximity to each other like in Southwest, Western Australia and importantly, on the Gold Coast in Queensland. We've upgraded our clinical systems for improved medical imaging for efficiency and refer engagement. And we've also expanded teleradiology services using IDX's radiologist network across Australia and in the future, using our New Zealand radiologists, too, to assist in providing 24/7 coverage at the hospitals, predominantly Western Australia, where we provide this coverage.

We have also planned and commenced and will be completing the major redevelopment of the 300-bed St John of God hospital radiology department in September of this year, on schedule and including the installation of the first and only private PET facility in Geelong, the fourth PET facility within the IDX Group and a modality that has done very, very well for us.

We've opened new community sites in -- on Torquay Road in Grovedale, and we've also replaced our MRI in Mackay with a higher, wide bore MRI to better service the community.

We've developed centers of excellence, a new spine center in Smith Street on the Gold Coast. And we've completed the acquisition of New Zealand's Centers of Excellence in neurovascular and musculoskeletal services. We've completed a bolt-on acquisition in Geelong, and we have completed the integration of the Western District Radiology in Southwest MRI in an earnings accretive manner.

On the operating expenditure side, the vendor audit and cost control program that Anne referred to has delivered strong returns. And on the CapEx side, as you saw earlier in Anne's presentation, we've reduced spend through capacity -- through increased capacity utilization, economies of scale and purchasing efficiencies.

There are 4 important new contracts that we've executed this year. We've executed a contract with the St John of God hospitals for 3 of their hospitals, where we've increased tenure for a further 10 years. We've renewed our Breast Screen Victoria accreditation and contract for a further 4 years. We have also renewed and extended our debt facilities for another 3 years. And importantly, as Anne mentioned, the average cost of that debt is at 3.8%, increasing to around 4% after the acquisitions. We've committed to the development of a Center of Excellence in partnership with the Australian Prostate Cancer Research Centre in North Melbourne.

Moving on to the New Zealand acquisition, which was an important milestone for us this past year. The 3 businesses that we acquired in New Zealand, the Specialist Radiology Group or SRG, Trinity MRI and Cavendish Radiology, are the leading clinics in Auckland. They employ very well-known reputable leading New Zealand specialists in musculoskeletal radiology and in neuroradiology. We completed the acquisitions on the 2nd of July. They're a strong cultural and strategic fit that provide a premier platform for us to enter New Zealand and grow and I will say, importantly, diversify our group revenue. These businesses are immediately EPS-accretive.

Our purchase consideration was a NZD 105 million, 80% -- $25 million in IDX equity, 80% of which is escrow for up to 5 years, and $80 million in cash, which we funded through a new $60 million debt facility plus existing debt. There is a staged earnout for the vendor radiologists, the 14 vendor radiologists in the group. The financial impact of this acquisition is a projected FY '19 EBITDA contribution of between NZD 13 million and NZD 14 million. And it also has the effect of increasing our net debt to EBITDA to about 2.2x. This is an exciting acquisition. It is in a high growth corridor. It meets all of our strategic considerations. It's an excellent cultural fit. The radiologists are leaders in their field, and the historical growth and prospects for future growth are very favorable.

We now operate in 4 markets, including New Zealand. We have 53 sites, 13 hospital sites, 19 MRI machines. We have 12 licensed MRI machines, 9 of which have full MRI licenses, an important asset in the Australian environment. In New Zealand, MRIs do not need licenses in order to be reimbursed by the major payers in the country. And we've acquired 3 new state-of-the-art MRI machines in the acquisitions that we've made in Auckland. We have 80 employed radiologists within the group and a further 59 that are contracted. And we have a total of 928 employees now in our company.

Our strategy for FY '19 is still good medicine is good business. We're going to continue to drive organic growth and efficiency initiatives by leveraging off our hub and spoke model using our concentrated regional networks to deliver efficiencies through cross referrals amongst clinics within the network -- between clinics within the network. Our leading-edge technology solutions, like the PET solution that we recently implemented up in Queensland, and the smart rostering solutions that we're in the process of implementing. We're going to continue our strategy of developing centers of excellence, including the new Prostate Centre in North Melbourne. And we're going to very certainly continue on our strategy of medical leadership and clinical excellence. We will make further strategic acquisitions, acquisitions that fit our culture, that are in high growth areas that demonstrate the ability for good growth going forward and that meet our strategic considerations.

Our outlook is continued positive as it has been to date. Following completion of the acquisition in New Zealand and in Geelong, IDX will operate 53 clinics. The ongoing fundamentals are good, and they will drive continued organic growth within the business. Importantly, all of the growth, as Anne mentioned, in financial year '18 is organic growth. So the 20.5% that we've seen in net profit after tax -- net operational profit after tax is based on pure organic growth. And in fiscal year, last financial year '19, our priorities are to leverage off our diversified revenue streams, to develop hub and spoke models that we have, to drive further organic growth and further efficiency gains. We're going to focus on implementing smart technology solutions to further improve the referrer and the patient experience. We're developing the Prostate Centre of Excellence in partnership with the Australian Prostate Cancer Research Centre. We're going to conclude our review of radiologist recruitment, retention, incentives and escrow arrangements. And we will integrate the New Zealand and Geelong Medical Imaging acquisitions, all of which are earnings per share accretive. And we will also importantly continue to execute on further acquisitions that are a good cultural and clinical fit and are strategically aligned.

We're happy to take questions at this point.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Gretel Janu with Crédit Suisse.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [2]

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So you clearly benefited in the year from profit operating leverage, but could you give us a bit more color on which states had the biggest benefit? Was the improvement consistent across all states?

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Anne Lockwood, Integral Diagnostics Limited - CFO [3]

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Definitely there was improvement in the cost efficiencies and revenue across all states. I think we've stated that our revenue increased and volumes increased across all business units and across all regions. That did vary. We had strong revenue growth in WA. We've noted that Queensland was slightly impacted by access issues in quarter 1 in the Commonwealth Games, but there was still positive growth. But the cost efficiency has been across the whole business and not -- the reason for that is that we have leveraged off our national purchasing power, brought all our vendors together under one umbrella and therefore, all business units, including the corporate shared service area, have benefited from that.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [4]

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Right. And then just on CapEx, it came in well below expectations. Would you be able to give us an outlook on FY '19 CapEx? And is there still capacity to leverage additional economies of scale?

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Anne Lockwood, Integral Diagnostics Limited - CFO [5]

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As I've said, we are focused and we will continue to do that and go out to -- under a net sort of national procurement approach, grouping all of our purchases together, so we do expect certain savings from that. That's the process we're currently going through at the moment and executing on. There will be continued growth CapEx. As we've said, we will be developing the Prostate Centre. We're not giving specific outlook of CapEx at this time or any outlook numbers at this time, but we would expect roughly spend should be similar.

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Operator [6]

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Your next question comes from Will Macdiarmid with Ord Minnett.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [7]

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Just a few questions from me. I'm just looking at your sort of working capital, specifically the increase in payables. Can you just talk a little bit -- or just clarify a little bit around that? And also just confirm that, that was one of the normalizing items in your normalized free cash flow?

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Anne Lockwood, Integral Diagnostics Limited - CFO [8]

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So what -- the $1.4 million the increase in CapEx, that was because we've got our large payment on the St John of God hospital, so payments for that. And also, we had accounts payable outstanding on the transaction costs on New Zealand at 30 June as well.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [9]

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Okay, no worries. And just in terms of your growth in revenues versus your growth in volumes, which I know you pointed to being as a result of the reporting contracts, is there a way to renegotiate the processing costs of the contracts, particularly given you've put some investment into the IT solution?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [10]

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Sorry. Will, can you restate the question? Is...

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

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Yes. Just I've noticed that the revenues grew slower than volume growth, which you pointed out was related to the reporting contracts. Is there a way to potentially negotiate a better pricing outcome or renegotiate commercial terms of those reporting contracts?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [12]

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The terms on the reporting contracts are good. We're happy with those terms. We're not focused on the fact that volumes grew further -- grew faster than revenue because our margins have improved. So our margins continue to be strong. We're happy with those reporting contracts. We've seen additional volumes come through the reporting contracts. It's just because of the structure of those contracts that we do see the difference between volume and revenues. So importantly, we don't employ the staff and we don't buy the equipment for those reporting contracts. We only employ the radiologists and we report on those contracts. So that's why the margins on those contracts are good. But we don't see -- the revenue is not at commensurate with the volume growth.

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

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Okay, no problem. And I guess, could you just make a quick comment on the recent closure on Geelong Private, what your expectations are there for volume growth? And did you -- have you had many disruptions from the refurbishment of that center?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [14]

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Yes. There have been some -- as with any refurbishment, there is disruption while the refurbishment goes on. But we expected that. And once the refurbishment is done, those disruptions will obviously abate. We do expect and we have seen some benefit from the closure of the Healthscope hospital in that we provide services to the 300-bed St John of God hospital, which is located very close to the Healthscope facility. So as St John of God has benefited at their hospital, so have we benefited in our radiology department. We expect to further benefit once the refurbishment there is complete. But excitingly for us, the PET scan that we've put in there, we only recently put it in a few months ago, and we already have a waiting list. So -- but that has been very good for us and we see the rest of that development turning out nicely, very positively.

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Operator [15]

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Your next question comes from Simon Conn with Investors Mutual Limited.

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Simon Conn, Investors Mutual Limited - Senior Portfolio Manager [16]

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Well done, great result. Just wanted to maybe jump the gun, but can you just give us a feel for what a change of government would mean and what are the Labor policies towards radiology? Yes, in your terms, your feedback from talking to the industry players, what impact would that have?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [17]

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Well, one of the major changes, Simon, it is that Labor have promised additional MRI licenses in regional areas. We think that some of those licenses may go to public facilities. We know that they have visited some of our public facilities where we provide services in Western Australia and have promised licenses to those facilities. So we see a benefit from our reporting contracts in Western Australia when the towns and small cities that have been promised this -- that have been promised MRI licenses get them. We see benefits to our reporting contracts. We're not sure if Labor are going to promise additional MRIs in areas that may compete with us so there may be some offset from that. But what we do know about the Labor policy is that they had promised divisional MRIs in regional areas, and the effects of that on us will be both positive and negative. So it will be mixed.

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Simon Conn, Investors Mutual Limited - Senior Portfolio Manager [18]

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All right. And can you also just comment on your M&A pipeline? Is this -- what that looks like?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [19]

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Thanks, Simon. The M&A pipeline is fairly full. We have a number of opportunities that we're looking at now. At the end of last year and early this year, when we looked at opportunities, when the market was becoming a little frothy, a little on the high end, vendor expectations were a little high, there were fairly ordinary growth businesses where being sold at multiples of 8 to 9x. So at that point, we elected to pivot to New Zealand, where we could find good high-growth asset at fair prices. And we applied 3 of those in New Zealand, and that acquisition for us is looking to be a really, really positive acquisition for us. And we're continuing to look for similar types of acquisitions here in Australia and in New Zealand, where we see high growth, where we see good strong margins and where we see good cultural and strategic fit with our business. So we're actively pursuing those opportunities and expect next year this time to be reporting on other similar acquisitions as what we've made today.

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Operator [20]

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Your next question comes from Vanessa Thomson with CLSA.

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Vanessa Thomson, CLSA Limited, Research Division - Research Analyst [21]

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I just wanted to return to Will's question around reporting contracts and wondered if you could give some color about how you see the proportion of these in FY '19.

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [22]

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So the reporting contracts are a material components of our revenue. They make up about 8% of our revenues. So it's not -- it's important, but the bulk of our revenue to date, and this is excluding New Zealand, I'm looking at financial year '18 numbers, still come from Medicare, patient self-pays and private payers.

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Vanessa Thomson, CLSA Limited, Research Division - Research Analyst [23]

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Okay. And so you expect that to be similar in FY '19 or given the New Zealand addition, perhaps lower?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [24]

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Yes. It will go down because of the New Zealand acquisition. So it'll reduce from 8% to a lower percentage. Probably around 5% or 6% just given the relative sizes of the business. But the dollar value will continue to increase, and we have been there in terms of comparisons to the same period last year. We've seen nice growth on that -- in those Western Australian country health hospitals.

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Vanessa Thomson, CLSA Limited, Research Division - Research Analyst [25]

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And then just one more. I wondered, with the New Zealand acquisition, what proportion of the consultations there are private versus public?

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Anne Lockwood, Integral Diagnostics Limited - CFO [26]

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It's a 100% private business. So with the sources of revenue coming largely from the ACC and from Southern Cross Healthcare. Otherwise, the patients pay out of pocket. So it's a -- there isn't a similar Medicare system in New Zealand. It comes from the ACC or Southern Healthcare or directly from the patients themselves.

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Operator [27]

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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 [28]

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I just wanted to revisit an earlier question just around the sustainability of your EBITDA margins and then just also on the CapEx side of things just to make sure that the step-down we saw in '18, there's no timing issue there that we'll get a catch-up spend from that in FY '19.

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Anne Lockwood, Integral Diagnostics Limited - CFO [29]

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Yes. Thanks, Steve. Certainly, the EBITDA margin that we've delivered of 20.1 percentage is strong. We're always looking for improvement and efficiencies in our business. But we will be going through a year this year where we are integrating acquisitions and we don't want to stagnate growth. But we certainly don't expect the margins to go backwards, but we would always look for improvement. In regards to your second question, could you just repeat the question for me?

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

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It was just around the...

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Anne Lockwood, Integral Diagnostics Limited - CFO [31]

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The CapEx?

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

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Yes, yes, yes.

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Anne Lockwood, Integral Diagnostics Limited - CFO [33]

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Yes. There is always timing certainly with the timing of our replacement CapEx. But that sort of $8.5 million to $10 million per year would be in the range of where we would sit with our replacement CapEx. So there isn't anything unusual on timing this year that's causing that to skew down slightly. It was driven by savings efficiencies, not deferment of replacement CapEx. As you'd know, under the Medicare regime, we can't defer replacement CapEx. Otherwise, the machines aren't eligible for us to claim Medicare rebates on.

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

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Sure. Okay, next question was just with regards your growth. Are you able to give a little bit more color as to what the gross rates were like across some broad -- the different modalities that you offer?

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Anne Lockwood, Integral Diagnostics Limited - CFO [35]

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We don't necessarily -- we don't go into those specifics and provide that detail. Medicare certainly does break it down. I think we're very comfortable to say that we had growth in all of our modality and probably particularly in our cities with a high growth area and also the MRI. So that's a real focus for us on those high modality areas, but we can absolutely 100% confirm that we had growth across all of our modalities.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [36]

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Yes, okay. And just slightly related, I guess. When you look at the Medicare changes, the removal of knees and then the prostate -- the coming in of the prostate being listed, what's the pricing -- maybe margin differences between those 2 procedures?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [37]

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Well, without getting into too much detail on those, it's -- we're fairly comfortable in stating that MRI of the prostate will be more beneficial for us than removing the knees will be detrimental for us. So MRI of the prostate is a very positive move for us. The removal of GP-referred MRI of the knee for patients over 50 is not a positive move for us, but it will be more than offset by the prostate MRI, which is now on the Medicare Benefits Schedule.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [38]

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Yes, right. If I can just ask one last question, and this is a slightly crude comparison but I just wonder if you might help sort of explain it. If you look at Slide 19, where you're comparing your 4 different regions, the proportion of the employees to radiologists seems a hell of a lot higher in Australia than in the business that you're acquiring in New Zealand. Do you have an explanation as to why that is the case?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [39]

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Yes. The New Zealand radiologists do a lot more work in the public sector. So most of the New Zealand radiologists work with us for 3 or 4 days a week as opposed to the Australian radiologists that are full-time 5 days a week.

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Operator [40]

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Your next question comes from Shuo Yang with Microequities.

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Shuo Yang, Microequities Ltd. - Senior Investment Analyst [41]

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Just want to understand where the Board of Management sits on in terms of funding for the acquisitions where the comfort level sits around the net debt to EBITDA level?

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Anne Lockwood, Integral Diagnostics Limited - CFO [42]

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Yes. I think we've always been really clear that on a -- 2.5 is a comfortable range for us. Obviously, when you're in a growth phase and you're in an acquisition phase, you -- we need to be flexible in terms of maybe going up to the high 2s towards the 3, but clearly showing that on a forecast basis, we can bring that down to the 2.5 and below.

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Shuo Yang, Microequities Ltd. - Senior Investment Analyst [43]

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Okay. And you feel given the pipeline of acquisitions that you can potentially self-fund that this year with the expanded earnings base and the free cash flow generated this year?

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Anne Lockwood, Integral Diagnostics Limited - CFO [44]

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Yes. We're always looking at our funding structures and how those acquisitions and acquisition pipeline will be funded. And obviously, we have great relationship with our bankers, and we're continuing to look at that.

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Shuo Yang, Microequities Ltd. - Senior Investment Analyst [45]

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Okay, understand. And just...

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

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We probably only have time for one more question in that we do have a hard stop at 11:45.

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Shuo Yang, Microequities Ltd. - Senior Investment Analyst [47]

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Sure. Just one more before I go. Just want to understand, you said the multiples in the market have come back a bit. Where does that fit now for the high-quality clinics to fill the acquisition multiples?

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Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [48]

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Well, the multiples in the market are still aspirational for businesses that meet the criteria that we're looking for. So for the high growth businesses with good margins in areas that we're looking at the high growth corridors are still fairly expensive, but there are businesses that meet our criteria that we think we will be able to conclude a deal at a fair price. But we do have a fairly full pipeline right now that we're executing -- that we're in various stages of speaking to the vendors on.

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Operator [49]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.