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Edited Transcript of IDX.AX earnings conference call or presentation 21-Feb-21 11:00pm GMT

·44 min read

Half Year 2021 Integral Diagnostics Ltd Earnings Call Feb 22, 2021 (Thomson StreetEvents) -- Edited Transcript of Integral Diagnostics Ltd earnings conference call or presentation Sunday, February 21, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anne Lockwood Integral Diagnostics Limited - CFO & Chief Commercial Officer * Ian Kadish Integral Diagnostics Limited - CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * David Andrew Stanton Jefferies LLC, Research Division - Equity Analyst * John Deakin-Bell Citigroup Inc., Research Division - Director & Head of Healthcare in Australia & New Zealand * Rachael Harwood Macquarie Research - Analyst * Sean M. Laaman Morgan Stanley, Research Division - Australian Healthcare Analyst * Steven David Wheen Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare * William Macdiarmid Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Integral Diagnostics IDX FY '21 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Ian Kadish, CEO. Please go ahead. -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [2] -------------------------------------------------------------------------------- Thank you very much. My name is Ian Kadish. I am the Chief Executive and Managing Director of Integral Diagnostics. I'm joined here today with -- by Anne Lockwood. Anne is our Chief Financial and Commercial Officer. It is our privilege today to be able to present to you on another strong set of results for Integral Diagnostics in what has been a challenging period. The results today were made possible by the hard work and diligence and by the selflessness and bravery of some of the finest doctors and staff in the industry, frontline health care workers who always put their patients first. At Integral Diagnostics, we believe in a vision of a healthier world, and we deliver on this vision one patient at a time by delivering the best health outcome for each patient that we serve. We always put our patients first. We believe in strong medical leadership. Improving outcomes of evidence-based care were always led by the science. Everyone counts at Integral Diagnostics. We deliver sustainable value to all stakeholders, to our shareholders, but also to our referrers and to the environment, too. And we embrace change, and we've been called upon to do this in a year that has had more change than any other in our history. We delivered on our values in the first half of financial year '21 by serving 450,000 patients and conducting more than 1 million patient exams. We invested in COVID-safe environments for our employees and our patients. And we ensured that we could continue to provide optimal quality care by investing more than $10 million in new capital expenditure. We have 221 reporting radiologists in our group. 152 are employees and 69 are contractors. Importantly, 85 radiologists are now shareholders. This is up from 63 in the last reporting period. We've initiated the development of subspecialty workflows, which is consistent with the trend that we see worldwide to superspecialization in medicine. And we have executed a joint venture with the Medica Group Plc, a pure-play teleradiology provider listed on the London Stock Exchange. The joint venture is called MedX, and we expect to -- we expect it to take a while before we see material earnings come through the joint venture. At IDX, everybody counts, all 1,478 employees. We have developed an IDX leadership program, which will be made available to doctors and staff across our business. And we've continued to press our ESG agenda. We created value in the past 6 months by increasing operating net profit after tax by 61% and increasing operating diluted earnings per share by 38%. And we'll be declaring a dividend -- or have declared a dividend of $0.055. We also completed the acquisition on the 1st of September last year of the Ascot Radiology business in Auckland. Importantly, we've extended our finance facilities with over $400 million of debt capacity and a further more than $100 million in an accordion with a 5-year term, up from the previous term of 3 years. We now have 4,222 (sic) [4,229] IDX shareholders, and this is up from 3,892 in the last reporting period. And we've embraced change this year by changing our workflows and our systems to adapt to the new normal for COVID-19. We've continued to progress our AI applications with introduction of new algorithms. And we've continued to press forward on our digitization agenda. We expanded the leadership team in this last half year period by appointing a Chief Operating Officer from the 1st of November. We were fortunate to be able to appoint Paul McCrow, the -- previously the General Manager of our Western Australian business, and also a Founder and General Manager of the IDXt teleradiology business. We were delighted to be able to appoint someone from within and to be able to find someone and have someone the caliber of Paul to take over as Chief Operating Officer. As a growing business, though, in addition to trying to point from within, which is the IDX way, we also appoint from outside when we need to when we are able to find the best of the best in the industry. And in that regard, we are fortunate to be able to find Nynne Beck-Pedersen, who previously worked for a competitor of ours and who joined us on the 1st of September. It's wonderful to have Nynne on our side of the table. Our financial highlights this half are impressive. We increased our statutory net profit after tax by 82% to just shy of $20 million in the half. We increased our operating net profit after tax by 61% to $23 million, and we increased our operating EBITDA by 50% to $52 million. We also increased our operating earnings per share by 38% to $0.116 per share and drove our revenue up by 29.5% to $170.7 million. We increased free cash flow by 70% in the period. And we've improved our net debt to last 12 months EBITDA to 1.4x from 1.8x in the last reporting period. With regard to COVID-19, patient activity continued to be impacted both by COVID-19 and by the government-imposed restrictions. Victoria saw significant reductions from July to September, the first quarter of the year, with the October to December quarter coming back in line with our expectations. The ongoing border closure between New South Wales and Queensland also impacted patient volumes at our Northern New South Wales Tweed Heads side. We received JobKeeper of $6.6 million after tax, and this allowed us to retain and to support our highly skilled workforce. We reduced our discretionary spend in areas like travel and printing and conferences from the prior year by $600,000. And we recognized our healthcare heroes on the front line and support staff with recognition for COVID-19 care at a cost of $400,000. We also incurred additional employee costs of approximately $1.7 million, driven by decreased use of annual leave and an increased use of sick leave entitlements for things like quarantine, COVID-19 testing, self-isolation and the like. Proudly, we're happy to declare a fully franked interim dividend of $0.055 per share, the same amount as we declared last year this time. The dividend represents 55% of our statutory NPAT, lower than our usual policy of 65% to 75%, which reflects a recognition of the first half JobKeeper receipts and the ongoing uncertainty of the impact of COVID-19 on our operations. On Page 5, we show a graph that displays the industry revenue and services growth over the past decade or so for both revenue growth and for services growth in the states where we operate. Industry growth rates in Australia have all been impacted by COVID-19, as you can see from March 2020 onwards. The top line in the graph represents the revenue growth to the industry, and the bottom line in the graph represents the services growth. The reason that the 2 lines diverge in recent years is that the medical industry has become a lot more -- we've seen a lot more volumes being referred for the high-tech test in areas like MRI, nuclear medicine and CT versus the lower-tech basic ultrasound and x-ray investigations that were referred previously. Just as a comparison, the industry revenue growth rate of 2.8% would compare favorably to our same-store growth rate of about 6.5%. I'm now going to hand over to Anne to take us through the numbers. -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [3] -------------------------------------------------------------------------------- Thank you, Ian, and good morning, everybody. I'm on Slide 7, which is the page for our results, which include the impact of AASB 16 for the first half of '21. As you will have seen, there's a little bit to unpack in our first half results, which do reflect solid organic growth. But it includes a full 6 months from Imaging Queensland, which is an additional 4 months from the prior year; and 4 months contribution from Ascot Radiology, which we completed on the 1st of September. It also includes net impacts of COVID-19, including the receipt of $6.6 million of -- net of tax of JobKeeper receipts. In the first half, we delivered $170.7 million worth of revenue, which was a 29.5% increase, which drove a $52 million operating EBITDA at a margin of 30.5%. Our operating NPAT of 23.2% increased $8.8 million from prior year's $14.4 million or 61.1%. Our operating diluted EPS was $0.116, up 38% from the prior comparative period. And we had a statutory NPAT of $19.9 million, up $9 million from the prior period or 82.6%. These strong results gave us a free cash flow of 42.7% and 95% conversion rate net of replacement CapEx. As of the 31st of December, we had net debt of $137.3 million and a net debt-to-LTM EBITDA ratio of 1.4. I want to be clear that, that does include AASB 16. On a pre-AASB 16, our gearing ratio would be 1.5 to 1.6x. On this page, we have included down the bottom in italics, as we said we would, the impacts of AASB 16 on our first half results and what we expect them to be for our second half results. Just so those that haven't got their head around AASB 16, they can work backwards and get clarity of the numbers. Turning to Slide 8. We've reconciled our operating results to statutory results. There's nothing new in these adjusting items. They include transaction and integration costs for acquisitions, our share-based payments and the amortization of customer contracts. You will note an increase in the amortization of customer contracts, and that's driven by our New Zealand acquisition, where when we apply purchase price accounting, the value assigned to customer contracts are higher than they would be in Australia because we have the significant contracts with the main funders being the ACC and Southern Cross Healthcare in New Zealand. It is just an accounting standard application and there are noncash impacts from that amortization, and that is why we normalize them out for our operating earnings. Turning to Slide 9. We're just showing you our 5-year results and where we are. Importantly, obviously, the $52 million for operating EBITDA is the half year, whereas the rest of the results are for full years. And FY '20 and the first half '21 are inclusive of AASB 16. As Ian said, we will be paying a fully franked dividend of $0.055 per share, which is a conservative payout ratio of 55% of statutory NPAT, which is reflecting the recognition of JobKeeper receipts and the ongoing impacts of COVID-19 on operations. Our first half dividend record date is the 2nd of March '21 and a payment date on the 6th of April. The dividend reinvestment plan is available for participation in the first half '21 dividend. Turning to Slide 10 and going through our revenue in detail. Importantly, there were consistent trading days in first half '21 and first half '20, which is both 128 days. Operating revenue was up 29.5% to $170 million. This had solid underlying growth despite the ongoing impacts of COVID-19. It was driven by new sites, investment in new equipment and additional contribution from acquisitions. We have broken down our revenue growth of $38.9 million to show you that $23 million contributed -- the extra 4 months from Imaging Queensland; $7.4 million from the Ascot Radiology acquisition; we had organic growth in Victoria of $1.2 million. Interestingly, our first quarter growth in Victoria was minus 1.1%, and the second quarter growth in Victoria was 7.5%. So there was a strong rebound consistent with the rest of the country in the second quarter of the half. And across the rest of our business, we had organic growth of $7.3 million. Our organic growth of 6.5% and volume growth in revenues and volume growth of 1.7% was well above the industry average for the states in which we operate. And this reflects that IDX significantly outperformed the industry in first half '21 by 3.7% on revenues and 3.8% on volumes, respectively, and we're very pleased with that continuing trend. New Zealand contributed revenue in the first half '21 of $21.5 million compared to $13.1 million in the prior year. And again, our average fee per exam increased by 2.6% in the first half. This is again driven by increased volumes of higher-end modalities being CT, PET and MRI. And also, the indexation of 1.5% across CT, ultrasound and X-ray on Medicare-scheduled items from the 1st of July also contributed to that increase. Turning to Slide 11 and our operating expenditure, which was challenging to control cost effectively in the first half during the current environment that we're operating in. As a result, we did experience a $1.3 million -- or $2.3 million increase in operating costs as a percentage of revenue, and this was largely driven by increasing employee leave costs. So adjusting for JobKeeper of a gross $9.5 million against employee costs increased by 1.5%. This was largely driven by a decreased use of annual leave. We found it very hard to get staff off on leave because clearly, they couldn't travel anywhere, and we've made the position to not force people to go off on leave. And we also had an increased use of sick leave. Consumables increased slightly due to higher cost of consumables on the higher-end modalities and also the increased use of PPE across our sites. Equipment increased by 0.3% of revenue due to some equipment coming out of warranty, particularly in our North Melbourne site, and increasing the level of cover on Imaging Queensland equipment to be consistent across the IDX Group. Our occupancy costs remain consistent as a percentage of revenue. Disappointingly, some landlords that have provided concessionary rebates in FY '20 as a result of COVID reversed that decision and required us to pay back those rents. Other costs declined by 1% of revenue due to a reduction in spend to COVID-19 of $0.6 million, as we pointed out, but also the shared service costs being leveraged over a larger revenue base. We had depreciation of $9.5 million, and this was increased in line with our growth capital investments plus an extra 4 months of Imaging Queensland and Ascot Radiology. Declining interest rates delivered lower finance costs, and we had around about a 2.5% average cost of debt, which is very pleasing, and that has also rolled over into our new facilities. Turning to Slide 12 and our capital management slide. We've got a strong balance sheet. We have -- our leverage has reduced significantly of the strong cash flows that we've delivered and are growing EBITDA. We have extended and rolled over our finance facilities with a committed capacity increase to $402.6 million. And we have an additional $105 million available to us under an accordion facility. And most importantly, we have locked these in for a 5-year term. So we've got great support from CBA and Westpac, our club facility participants. And we're very pleased to be continuing our relationship with them for the next 5 years. Most -- other important areas in the balance sheet is trade payables have increased. We had some large CapEx items installed in December 2020. Contingent consideration of $23.7 million relates to New Zealand, $3.8 million; Geelong Medical Imaging of $1 million; and Imaging Queensland of $18.9 million. (technical difficulty) is a result of completing the calculation based on the calendar year for earnout A component, which was clearly set out in our SASA, and that Imaging Queensland delivered results in accordance with the calculation, around $500,000 higher than what we expected. Under the accounting standards, we were able to -- we had the 12-month window available to us, and we were able to adjust the contingent consideration against goodwill that increase. That is based on our best expectations at the moment of what we expect to pay. All other assets have increased in line with the increased size of our business due to the Ascot acquisition. Turning to Slide 13 and our cash flow and cash conversion. As we have pointed out, we had strong free cash flow of $42.7 million. If I add back the $6.7 million replacement CapEx, we had a 95% conversion rate, of which we're very pleased with. Turning to Slide 14 and our capital expenditure. We spent $10.3 million in the first half. $6.7 million of that was on replacement CapEx. There were no large items that we had to replace, but we did have around 30 smaller ultrasound X-ray, bone density and mammo machines that we replaced across all business units. And our significant growth CapEx items was we installed a cardiac CT in Busselton. We installed a second CT at our Toowoomba site. And in December, we installed an MRI at our Spine Centre on the Gold Coast. This is a nonrebatable MRI, and we were very confident making that decision due to the demand for MRI services on the Gold Coast. And that MRI to date is performing well within our expectations, and we're very pleased with it. Our FY '21 CapEx, we expect to spend $16.7 million. And the majority of that in the second half will be on maintenance of around $6.5 million. To date, we have no material growth CapEx planned for the second half of FY '21, and this is in line with a conservative approach to our CapEx spend. But we certainly have planning in -- on the way. It is a part of our budgeting process for further growth CapEx and new sites across all of our business units in FY '22. Turning to a regulatory update. I'm on Slide 16. In November 2020, we did -- we have seen an increased level of compliance activity over billings from the department, and that has been evident across the whole of the industry. This has resulted in an increased level of Medicare claim reviews. IDX, on behalf of our radiologists, has complied with all requests from the department on queries in relation to our adopted billing practices and protocols. And we have not identified any material areas of noncompliance, and we are very comfortable with the process the department is running thus far. In February 2021, we were quite excited to be involved in and to see ADIA launch the "healthcare relies on radiology" campaign. This is a really strong campaign, which is designed to communicate the importance of radiology to the health system and patient outcomes and promote government investment. As part of the campaign, ADIA worked with Deloitte Access Economics and -- that delivered a study that demonstrated radiology is cost-effective in increasing quality adjusted life years for 6 (sic) [7] common and important diagnoses. And we would encourage you to read the full report, and we've given you a link to the ADIA website on that. It's a great report, and it's a very strong evidence of the importance of radiology in the health care sector. IDX will continue to work for our membership of ADIA on addressing key regulatory issues, and we're very positive about the outlook of the regulatory environment in Australia as we are in New Zealand. I'll now hand back to Ian to walk us through our strategy slides. -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [4] -------------------------------------------------------------------------------- Thank you very much, Anne. IDX now operates in 5 key geographic markets: We operate in Victoria; in Queensland and Northern New South Wales through our South Coast radiology division; in Western Australia in Southwest Western Australia in the cities of Mandurah, Bunbury and Busselton; in New Zealand in the Greater Auckland region, where our acquisition of Ascot Radiology filled out our offering a lot more, including the provision for the first time in Auckland of a PET scanner; and Imaging Queensland, our business in Central Queensland and on the Sunshine Coast, which we acquired in November of 2019. We now have 72 sites. 26 of our sites are comprehensive sites, and comprehensive sites are defined as sites that have more than one high-tech modality on site, things like MRIs, CTs, PET scans, and also sites that are located at or near major specialist referrers. We have 29 MRI machines across the group. 17 of these machines have MRI Medicare rebatable licenses, 13 have full licenses and 4 have partial. Obviously, our MRIs -- our 6 MRIs in New Zealand do not need Medicare rebatable licenses. We have 6 PET scanners across our group, including the new PET scan that we acquired with the acquisition of Ascot Radiology in September. We employ 152 radiologists and 1,408 employees at our sites, and a further 70 employees are employed centrally to support our sites. Moving to our final slide, 20. Our strategy remains consistent. Good medicine is still good business. We will continue to drive organic growth, business integration and further efficiency gains. We will accelerate our use of digital and AI technology. We'll drive our ESG agenda, and we will continue to nurture and develop culture and leadership across our people. And we will continue also to evaluate further strategic acquisitions that we see as a good fit. To date, in the second half of financial year '21, we continue to be trading in line with expectations notwithstanding the ongoing impacts of COVID-19 and the short lockdowns we've had in each one of our regions, in Western Australia, in Victoria and Queensland and in Auckland. IDX will continue to assess the ongoing impact of COVID-19 during the second half, including assessing any net positive benefit from the JobKeeper receipts that we received in the first half and the potential return of a proportion of those receipts once the uncertainty of COVID-19 has abated. We will continue to execute on our clear strategy in line with our values, to deliver the best health outcomes for all our patients. And I'll open the line up now for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Rachael Harwood with Macquarie. -------------------------------------------------------------------------------- Rachael Harwood, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- My first question is just around backlog. Do you have any thoughts on whether you'd work through the backlog and the volumes you're starting to see on new patients? Or do you think that there's still some catch up? And then are you seeing any variation state by state? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [3] -------------------------------------------------------------------------------- Yes. There clearly is a backlog of services. It's hard for us to determine exactly how much backlog there is. But we do know that each time a lockdown is introduced, we do see a fairly sharp decline in volumes, but then the volumes do come back shortly after the lockdown. The volumes in our experience have never come back completely. So there's always some patient volume that is lost to the system. Patients that either for a sporting injury or a temporary injury live with it. And then by the time the lockdown is over, don't present for imaging services. So in our experience, there is a backlog. The backlog does come back. There is some pent-up demand. We have seen that historically. But there is also some loss to the system, too. -------------------------------------------------------------------------------- Rachael Harwood, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Okay, great. And then could you just talk to maybe the growth profile for hospital based community centers, which were more impacted over COVID? And then if you're starting to see a change in these growth rates? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [5] -------------------------------------------------------------------------------- There's no question that the hospital sites were a lot more protected from declines during COVID than what the community sites were. What we found in our experience is that patients who had conditions like oncology conditions or rather chronic medical conditions, continue to present for their diagnostic imaging services through the lockdown. So our PET scans, our MRIs did not see nearly the kind of declines that we saw in the basic X-ray and the ultrasound part of the business. -------------------------------------------------------------------------------- Rachael Harwood, Macquarie Research - Analyst [6] -------------------------------------------------------------------------------- Okay. That makes sense. And then just last question for me, just around brownfield. Can you maybe give us a quick update on the progress of the completed brownfields? And then you mentioned that there was no growth CapEx in the second half. But do you think that the current environment maybe gives you a bit more confidence to deploy capital going forward? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [7] -------------------------------------------------------------------------------- Yes, the confidence is definitely coming back. We have invested, as Anne indicated, we recently acquired a new MRI and our Spine Clinic at the entrance of the Gold Coast on Smith Street that's a non-rebatable MRI. But given the demand we were seeing on the Gold Coast for MRI services, it made sense for us to acquire that. The other brownfields, the recent large brownfields that we put in over the past year or so continue to perform well. The PET scan, for instance, at the Southern end of the Gold Coast continues to perform strongly. And our brownfields, in general, are doing well. Melbourne has been a bit of an exception. So the -- more of a greenfield than a brownfield. The North Melbourne clinic that we did put in -- that we built 2 years ago has not picked up to its pre COVID levels yet. And it was hit quite hard during the COVID lockdown in Melbourne. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from John Deakin-Bell from Citi. -------------------------------------------------------------------------------- John Deakin-Bell, Citigroup Inc., Research Division - Director & Head of Healthcare in Australia & New Zealand [9] -------------------------------------------------------------------------------- Ian, I was just interested if you could give us a bit of color around the hospital-based business versus the community-based? And just maybe state by state, give us a feel for what the volumes have done and how that's impacted the business? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [10] -------------------------------------------------------------------------------- Thanks, John. The hospital-based businesses are generally those that have our comprehensive sites at them, although we do have some comprehensive sites located very close to a hospital. So across the street in some instances or very nearby. And these businesses are less impacted than community businesses during periods like COVID. And we also see more consistent growth at these businesses because they do depend on consistent diagnosis like oncology diagnosis, cardiac diagnosis and the like, versus the more orthopedic or sporting injuries that seem to reduce during periods of lockdown, for instance. Looking state by state. The only real exception that we can call out would be Victoria to the strong growth we've seen in all the other states. Victoria, during the first quarter of the year was impacted, as we called out earlier, quite significantly. We did see a lot of that improve back to pre COVID levels in the second quarter. But the other states, we've not called out any real differences in the other states. There was a lockdown in Western Australia in early February. We saw a short sharp decline during that lockdown, which most of that seemed to have come back afterwards. I don't know, Anne, if there's more color you can put on that? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [11] -------------------------------------------------------------------------------- No, I think you covered it, Ian. -------------------------------------------------------------------------------- John Deakin-Bell, Citigroup Inc., Research Division - Director & Head of Healthcare in Australia & New Zealand [12] -------------------------------------------------------------------------------- And just sorry, I missed this before. And on the CapEx, did you say for the -- did you give a number for the full year FY '21? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [13] -------------------------------------------------------------------------------- Yes, I did. As of today, we are expecting $16.7 million of CapEx for the full year. And most of that is that on maintenance CapEx of $6.5 million for the second half. So at the moment, we don't have any planned growth -- significant planned growth -- CapEx for the second half, that could change. But as of today, we don't. -------------------------------------------------------------------------------- John Deakin-Bell, Citigroup Inc., Research Division - Director & Head of Healthcare in Australia & New Zealand [14] -------------------------------------------------------------------------------- And just for the next couple of years, ex any acquisitions, is that -- is it going to be materially different than that? Or is there any sense that you could give us for the FY '22 year? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [15] -------------------------------------------------------------------------------- No. As I said, we are certainly going through our budget and strategy process at the moment. And we have got definite plans to open new sites across all of our business units in FY '22 and beyond. So we do expect to pick up a strong level of growth CapEx again in FY '22. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Your next question comes from Will Macdiarmid with Ord Minnett. -------------------------------------------------------------------------------- William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [17] -------------------------------------------------------------------------------- Ian and Anne, just a few questions. I guess on the average fee per exam, that showed quite a material increase this half. And I know that's been a consistent trend for you, but it was quite pronounced this half. I'm guessing that's partly related to the fact that hospitals were much stronger, which were obviously typically higher value. And so if we see a normalization in that dynamic, can we expect that, I guess, to moderate or come back? Or do you think this may be a little bit more sustainable? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [18] -------------------------------------------------------------------------------- Yes. It's a good question. Certainly, hopefully, sustainable. Obviously, it's been lifted by indexation, Will, which helped. And that will -- we would hope will be ongoing depending on what the level of indexation rate is announced after '22 and '23. But across our comprehensive sites, certainly, in a lot of our brownfields, we have focused on installing PETs, MRIs, CTs, those high modalities. We're being really clear that, that is our business model. And so therefore, the average fee as our volumes moved more towards those higher-end modalities, as we put more machines in, and that's our business model, we would hope to expect to see that continue to move Northwest. -------------------------------------------------------------------------------- William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [19] -------------------------------------------------------------------------------- Yes. Sure. I guess, for this first half, specifically, though, given community was growing a little bit slower than what the hospitals were, that would naturally just skew up that average fee a little bit just for this half specifically? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [20] -------------------------------------------------------------------------------- Yes, I don't know. I mean, as I said, we look at our sites. We have a lot of comprehensive sites in the community. Not all of our comprehensive sites are in hospitals at all. But there was strong growth. We didn't necessarily see a difference in the last quarter or within those growth rates across hospital or community sites. It was pretty consistent across all of them. -------------------------------------------------------------------------------- William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [21] -------------------------------------------------------------------------------- Okay. Great. So I guess, a bit of an extension from that and just in terms of growth activities. I mean to what extent is -- are there still some material brownfield opportunities? I guess, focusing on PET would be very interesting. But I guess, across the board and philosophically, whether or not you'd be, I guess, preferring brownfield over greenfield longer term? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [22] -------------------------------------------------------------------------------- Yes. Thanks, Will. We still do prefer brownfields. I mean brownfield, for us, are a lot clear and that they're quicker to execute. They are quicker to see the results. And we are also a lot more sure of our brownfield than we are of our greenfields because we know the referrers, we know the environment, and we generally know what brownfields will work. So brownfields are always our preferred mode of expansion. And brownfields do offer -- in the next year or so, do offer -- there are several opportunities for some good brownfields, particularly in the area of PET, as you mentioned, and also MRI. PET across the world has taken off recently a lot more significantly with new applications like PET applications for dementia, which -- for the diagnosis of dementia, which could be a real game changer and propellant for the PET industry going forward. So PETs would be an interesting area for us to expand into. MRIs, the application for MRIs continues to grow worldwide. So we are continuing to look at new MRI opportunities. And as you've seen, even non-rebatable MRIs, where we recently put that one into the Spine Centre. Also cardiac CTs are an area of growth for us. So all of these things, as you mentioned earlier, will help increase our average fee. But importantly, these are the new applications that add the most value to our referrers. -------------------------------------------------------------------------------- William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [23] -------------------------------------------------------------------------------- Okay. Great. And I guess just lastly, just in terms of sort of outlook for costs in the second half. Given the reasons of some of those increases in employee costs, specifically. In the second half, could we expect, I guess, a bit of a moderation there? Or what's your rough outlook, Anne? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [24] -------------------------------------------------------------------------------- Yes. It's look, it's hard to tell, Will. We will obviously try and focus on it. But as you've seen already in January and February, we have had sporadic lockdowns across all of our business units. And it's very hard in this environment, and we're very conscious about going too hard at costs. It's just not really the right time to do that. Certainly, once we're through COVID-19, and we've got a more balanced shift, hopefully, when we all get vaccinations over the next few months, certainly in FY '22, that is going to have to be a focus. But I don't think we would want to commit at this point to go in too hard at costs, to pull them down in the second half. -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [25] -------------------------------------------------------------------------------- The challenge with these short sharp lockdowns where we get very little notice is that you don't really have time to tailor your staffing demands to the expected volumes. So the lockdowns happened quickly. And they're over quickly. So it's hard to adapt your staffing as quickly as that. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from David Stanton with Jefferies. -------------------------------------------------------------------------------- David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [27] -------------------------------------------------------------------------------- I'd be interested in any comments you could make on organic EBITDA within divisions in the first half, particularly sort of around percentage numbers, whether we saw margin expansion in which divisions, please? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [28] -------------------------------------------------------------------------------- Yes, we don't give that level of detail, David. So all I can say is that there was growth across all business units, but we don't give specifics. -------------------------------------------------------------------------------- David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [29] -------------------------------------------------------------------------------- And then we saw a bit of a step-up as expected in depreciation. I wonder if you could give us some color for what you're thinking for the second half of '21 compared to the first half in terms of that depreciation number? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [30] -------------------------------------------------------------------------------- Yes, we expect it to be reasonably consistent. So we would expect for the first full year for '21 around $19 million of depreciation. -------------------------------------------------------------------------------- David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [31] -------------------------------------------------------------------------------- Fantastic. And my final question is more sort of strategic question. Given the obvious focus that you've got on PET and MRI that you've highlighted again today, I'm interested in understanding the percentage margin per test of a PET scan or perhaps per hour of a PET scanner and an MRI scanner compared to what we understand as always been higher-margin per hour CT scanning as a percentage. So could you give us some color on that, please? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [32] -------------------------------------------------------------------------------- Yes. The high-tech tests do have -- generally do have better margins than what the low-tech tests have. We also are able to often charge privately for some of the higher tech offerings that we have. During COVID in an effort to meet the demands in the community or meet the limitations that we saw in some areas, we changed to bulk billing for some of our basic entry-level tests, but did not do that for the higher acuity tests. So in Queensland, for instance, on the Gold Coast, we moved to bulk billing services for ultrasounds during the period because what we find is that patients often come in for an ultrasound, but then they require a more definitive diagnosis and are then referred on for the CT or the MRI. -------------------------------------------------------------------------------- David Andrew Stanton, Jefferies LLC, Research Division - Equity Analyst [33] -------------------------------------------------------------------------------- So would it be fair to say that PET and MRI have a higher percentage margin per hour of testing than CT scanning per hour of testing? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [34] -------------------------------------------------------------------------------- It is. It's a pretty complex area, David, because it really does depend on what sort of exams you're doing. And there's multiple exams that you can do on an MRI or a PET or a CT and some take longer. It depends on the level of consumables and type of consumables you're using. As you can appreciate, radiopharmaceuticals, reasonably expensive. So it's very difficult for us to give an all-around general answer on that. But certainly, our business model is around moving towards those high-end modalities. And clearly, we have got leading margins in the industry. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Your next question comes from Sean Laaman with Morgan Stanley. -------------------------------------------------------------------------------- Sean M. Laaman, Morgan Stanley, Research Division - Australian Healthcare Analyst [36] -------------------------------------------------------------------------------- I hope you're both well. First question relates to employment. So I noticed you had a nice kick up in the number of radiologist shareholders. I wonder if you're able to share anything with respect to terms of employment contracts or employment with those radiologists? And where do you think you can probably get to out of your 2 '21 reporting radiologists to sort of derisk potential levers, if you like. Thank you with the first question. -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [37] -------------------------------------------------------------------------------- The main component of that kicker, Sean, was the addition of the Ascot Radiology business to our group, which saw us bring on 16 additional shareholders. So that was the main component of that additional radiologist shareholding. We also offered a radiologist share plan again last year. And additional radiologists, new radiologists took us up on that share plan. The radiologist share plan, just for everyone's benefit, is the plan that is offered to radiologists that parallels what a radiologist would be able to receive in private practice. In other words, what we try and do is emulate the partnership track that some of the professional radiology firms have. And we provide radiologists an opportunity to acquire shares in the business and then provide them with a loan from IDX to match those shares that they acquired or to buy 2 shares for every share that they acquired. And this has been taken up every year. It's been more than fully subscribed each time it's been offered. -------------------------------------------------------------------------------- Sean M. Laaman, Morgan Stanley, Research Division - Australian Healthcare Analyst [38] -------------------------------------------------------------------------------- Great. That's great granularity, Ian. Second question is on the MedX JV. You mentioned it will take some time before it becomes material. But maybe just a bit of a snapshot, provide some steps how you plan to get it to materiality? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [39] -------------------------------------------------------------------------------- Yes, it really will take some time. So just to manage expectations around it, it is important to bear that in mind. But we are excited about the joint venture. MedX offers us the opportunity to use resources in the 2 countries to report after hours or to follow the sun a lot more efficiently than what we are able to do from Australia. So there are Australian Board-certified radiologists in the U.K. and similarly, there are U.K. Board-certified radiologists working within our group in Australia. And we will do reporting for the so-called Nighthawk Services that the Medica Group provide in the U.K., and we will also utilize some of the resources that the Medica Group has to do some reporting on some of our contracts after hours here in Australia as well. The access to additional radiologist reporters across the 2 countries allows us to load balance a lot more efficiently. It allows us to learn new markets as well. And over time, we expect to be able to use the new MedX joint venture to provide teleradiology type services in other geographies as well. Teleradiology for us has been a great area of growth. We've seen that in the IDX business. Recently, it's been very promising in terms of the growth that it provides. And particularly during times like COVID when a lot of radiologists converted to reporting from home, for instance, we were able to provide them with that kind of capability through teleradiology. So it made sense for us to look for the world's leading teleradiology providers and then to look to do something with them, and we're excited to be able to do that with the Medica Group, even though it will, as you say, take time. -------------------------------------------------------------------------------- Sean M. Laaman, Morgan Stanley, Research Division - Australian Healthcare Analyst [40] -------------------------------------------------------------------------------- Great. And one more final one. My sincere apologies if I missed it, but is there any commentary on JobKeeper for the second half? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [41] -------------------------------------------------------------------------------- Yes. Yes, there is. And we did call it out. We have not received JobKeeper in the second half. So just to be clear on that, we received JobKeeper only in the first quarter of last year. So we've not received JobKeeper since October, and we don't expect to receive JobKeeper in the second half. However, the JobKeeper that we did receive, the $6.6 million, we will be making an evaluation over the course of the second half or until we reach a stage where we're comfortable about the future impacts that we may see from COVID-19, and we may then elect to give a proportion of the unused portion of the JobKeeper back. But that will be a very a careful decision that the Board will make, bearing all factors into account. We did call it out in the document a few times. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Steve Wheen with Jarden Australia. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [43] -------------------------------------------------------------------------------- Ian and Anne, I just wanted to talk to the organic growth. You gave it for Australia. I wonder if you could tell us what it looks like in the half for New Zealand. -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [44] -------------------------------------------------------------------------------- Sure, Steve. You can -- off the revenue slide, you can work out what the organic growth was. So for the ease of everyone on the call, it was $1 million or 7.5% in New Zealand. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [45] -------------------------------------------------------------------------------- Right. Secondly, again, you've given that impressive turnaround growth rates between first quarter and second quarter for Victoria. I'm just wondering what that looks like for the rest of the business, if we break that half up into 2 components. -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [46] -------------------------------------------------------------------------------- Yes. It was pretty consistent across the rest of the Queensland and WA for the whole of the half. So the 6.5% of organic revenue growth that we've quoted includes Victoria. So you can probably extract what you would think that the growth in Queensland and WA were from that. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [47] -------------------------------------------------------------------------------- Yes, perfect. Okay. And can you give any commentary as to how the business is performing so far into the second half with regards to the top line? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [48] -------------------------------------------------------------------------------- Yes. We're performing on expectations. So despite the fact that we have had these lockdowns in each one of our business units, Steve, we're still performing as expected. So we've not called out anything different. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [49] -------------------------------------------------------------------------------- So you're returning back to a more normal growth rate? Or are you accelerating again versus first half? -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [50] -------------------------------------------------------------------------------- No, it would be a more normal growth rate. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [51] -------------------------------------------------------------------------------- Okay. Great. I did want to ask about the IQ contingency consideration that they qualified for another... -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [52] -------------------------------------------------------------------------------- I'd be surprised if you didn't, Steve. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [53] -------------------------------------------------------------------------------- What's that? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [54] -------------------------------------------------------------------------------- I'd be surprised if you didn't, Steve. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [55] -------------------------------------------------------------------------------- I'm just surprised that they could qualify during that 12-month period when you've had COVID for a large change to that consideration. Could you just sort of talk through what's changed in their business? And how sustainable that is for going forward? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [56] -------------------------------------------------------------------------------- Yes. No, look, it is a fair question. The Imaging Queensland business has done very well. And you will remember that the earn-out A is on a calendar year for 2020. So whilst there were COVID impacts and the share sale agreement did require us to act in good faith around significant areas or disruptions to the business, and it's certainly in our best interest for sustainability in the future of IDX to work closely with those vendors so that we come out with an outcome that is -- that everyone is comfortable with and satisfied, and we ensure that we have goodwill going forward. So we've actively done that, and we've worked with the vendors. We're continuing to work through that with the vendors. But they have performed slightly better than we expected. And if you adjust for sort of COVID, where they were impacted over April and May. But certainly, in Queensland, there has been a catch-up and an improvement in volumes over the remainder of the year. So COVID overall, there weren't huge impacts for that business. Particularly up in Rockhampton in the Central Queensland area? -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [57] -------------------------------------------------------------------------------- Is there -- I mean, you've obviously made a notional adjustment for the COVID impact to allow them to qualify for that. But is there a risk that the growth that you've seen since April and May is a bit of catch-up? And therefore, is not as sustainable? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [58] -------------------------------------------------------------------------------- I hear what you're saying. But look, that has all been taken into account. We're certainly, Ian and I, are not in the habit or our Board of giving away money for nothing. So we consider -- we're taking great consideration to work through all that. And I can assure you that the COVID adjustments are nominal because it does take into -- that impact all around. -------------------------------------------------------------------------------- Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Former Executive Director of Healthcare [59] -------------------------------------------------------------------------------- Yes. Great. Okay. My last question was just on the number of sites that you have. There appears to have been, and I think you've acknowledged, there's some closures. In particular, I'm looking at the hospital line, like there seems to be quite a bit of movement around hospital sites. I just wonder if you could talk to that across any of the major call-outs there? -------------------------------------------------------------------------------- Anne Lockwood, Integral Diagnostics Limited - CFO & Chief Commercial Officer [60] -------------------------------------------------------------------------------- Yes. So we've only closed 1 site, and that was Sippy Downs as part of the Imaging Queensland business. It was a very small minor site, and there were always plans for that to be closed down. So I think at 30 June, we've said 73 sites with Ascot Radiology, and we've got 72. What we've now disclosed is comprehensive sites. We've moved away from hospital sites because we felt it was a real anomaly, I guess, in the market and perception that the hospital sites were the be all and the end all. Whereas, in fact, we see the comprehensive sites that have the MRIs, the CTs are located within the specialist referrers, they're the real hubs of our hub-and-spoke model whether they sit in a hospital site or not. So we've changed that disclosure, and we're disclosing that we have 26 comprehensive sites across our business. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Kadish for closing remarks. -------------------------------------------------------------------------------- Ian Kadish, Integral Diagnostics Limited - CEO, MD & Director [62] -------------------------------------------------------------------------------- Thank you very much. We appreciate your -- everyone's interest and participation on the call. Anne and I are going to be -- going on a road show, our first real road show in some time. So we do look forward to be able to see many of you in person over the course of the next week or 2. So thank you all very much for your interest and participation this morning and most importantly, for your support.