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Operator: Good day, and thank you for standing by. Welcome to Sonic Healthcare's Financial Half Year Ended 31 December 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Dr. Jim Newcombe, CEO and Managing Director of Sonic Healthcare. Please go ahead.
James Newcombe: Thank you, and good morning. My name is Dr. Jim Newcombe. I'm the CEO and Managing Director of Sonic Healthcare. I'm joined by Mr. Chris Wilks, Chief Financial Officer of Sonic Healthcare; and Mr. Paul Alexander, Deputy Chief Financial Officer of Sonic Healthcare. We will be available for questions after the presentation. It's my pleasure this morning to give the financial and operational review for Sonic Healthcare for the half year ended 31st of December 2025. In the first half of FY 2026, Sonic Healthcare had revenue of $5.445 billion with EBITDA of $907 million and net profit of $262 million. Earnings per share were AUD 0.531. We are on track to achieve full year earnings guidance with strong revenue growth, including organic growth of 5%. EPS is improving and remains a top management priority, which will drive improvements in return on invested capital. Operating leverage and synergy realization are demonstrated by EBITDA margin enhancement for the majority of the business. Management has an ongoing focus on cost control across the business, including labor. An operating review of the U.S. business is underway, including rationalization of anatomical pathology operations. Several capital management initiatives are progressing, which we will update you on today. Today, we are maintaining EBITDA guidance previously issued in August and reaffirmed in November of $1.87 billion to $1.95 billion on a constant currency basis. In other guidance, depreciation expense is forecast to be $770 million to $780 million on a constant currency basis, which has been reduced from previous guidance. Interest expense has been tightened to be an increase of 15% on a constant currency basis versus the prior year with an effective tax rate of 27%. This guidance excludes any gains from sale of properties, includes completed acquisitions only with no regulatory changes assumed and current interest rates assumed to prevail. Operating leverage and synergy realization is demonstrated by EBITDA margin enhancement for the majority of the business. This table shows adjusted EBITDA margins when accounting for, first, acquisition costs of $8 million in the first half of 2026; second, the German KV fee quota minimum level change, which took effect from 1 January 2025 and is now cycling through as of 2026 calendar year; the LADR acquisition, which settled on 1 July and has had a lower initial margin than Sonic's average as expected and previously advised. The HWE, Herts and West Essex contract margin is improving, but still dilutive as expected and also previously advised. We experienced a margin decline in the U.S. operations due to low organic revenue growth and restructuring costs. This has less impact on the group margin expected to take place in the second half of this financial year, and we will provide further details later on in the slides. Overall, the adjusted EBITDA margins show a 30 basis point increase from first half 2025 to first half 2026. Our capital management priorities remain: first, to maintain an investment-grade balance sheet; then to maintain a progressive dividend with medium-term target dividend payout ratio of 70% to 80% of net profit. We are focused on strategic selective synergistic acquisitions; and finally, on share buybacks using surplus capital, for example, from sale and leaseback or other property sales. Today, we announced a progressive dividend of AUD 0.45, an increase of 2.3% on the previous financial year interim dividend. This interim dividend is 60% franked with a record date of 5th of March and a payment date of 19th of March. Our credit metrics remain strong with a debt cover ratio at historic levels of 2.5x. Recent increases in net debt relate to the acquisitions of the LADR Group and Cairo Diagnostics. Our currently available headroom is at $1 billion before the interim dividend payment. We would like to advise of several capital management initiatives, including a series of sale and leaseback transactions. A process is underway for the sale and leaseback of our Brisbane hub laboratory with a targeted completion of June 2026. We are expecting a significant gain on sale with potential tax capital gain partially sheltered by past capital losses. Further property sale and leaseback transactions are under consideration also with potential gains on sale. In addition, we have a conditional heads of agreement in place to sell a separate surplus Australian property with expected settlement next financial year. These capital management initiatives present an opportunity to use proceeds from property transactions to fund a possible on-market share buyback in the future. Our first half FY 2026 revenue split highlights the diverse global portfolio of medical practices in Sonic Healthcare. All of our positions are leading in stable and growing markets, which all present attractive growth opportunities. In Germany, we achieved 40% revenue growth on a constant currency basis with organic growth of 5%. Organic growth was impacted by the change to the minimum KV quota for statutory insurance fee schedule, or EBM, effective from the 1st of January with a 1% revenue impact as expected. Our LADR Laboratory Group acquisition settled on 1st of July, and integration is proceeding well across 16 separate work streams and proceeding to plan, including our first laboratory merger completed in Berlin. A large cycle of laboratory infrastructure investments has now been completed with the new Bremen National Reference Laboratory go-live planned for April 2026, and this follows laboratory projects and mergers in Biovis, Hamburg, and Munich. The combination of strong organic growth, synergy capture and strict cost control is driving significant margin expansion in our German market. We are successfully diversifying into high-value medically led direct-to-consumer testing through our dedicated [indiscernible] brand, which importantly is leveraging existing national infrastructure. We are aware of the proposed reform of the GOA private fee schedule. At this point, there is no certainty that reform will proceed nor its potential timing or impact. Moving to Australian Pathology, where we achieved strong organic revenue growth of 5% in H1. Annual indexation of 2.4% occurred on 30% of the Medicare schedule fees for Pathology from the 1st of July. and we have had successful ongoing implementation of private billing for selected tests, including vitamin B12. We are showing particularly strong growth in the specialist and hospital segments with the commencement of services at Australia's largest private hospital, the Hollywood Private Hospital in Perth from this month. We have recently acquired and commenced fit out of our new hub laboratory in the Docklands region of Melbourne, which will consolidate 4 Sonic Healthcare facilities and create vital capacity for future growth in this important market. A major laboratory platform procurement process was completed in this half, delivering substantial savings, which will continue into the future. We are awaiting the final determination from the Fair Work Commission's gender undervaluation review. Our industry association is in good faith discussions with the Department of Health on offsetting funding options. In the U.S., underlying organic growth once adjusted for the Alabama major payer contract loss and planned restructuring of anatomical pathology operations was 2%. An operating review with multiple improvement initiatives is underway across all U.S. operations. This includes the rationalization of 9 anatomical pathology practices with the aim of improving profitability and completing this financial year. Our wind down of Alabama operations has now been completed. The enhanced revenue collection system previously advised to the market is delivering benefits, but this is slower and likely less than previously expected. We are very excited to discuss our expanded advanced diagnostics division, which combines Cairo Diagnostics, ThyroSeq and other highly specialized reference and esoteric testing, which is maturing to a nationwide product offering. In addition, our ongoing digital pathology rollout is supporting optimization of workload distribution and productivity and proceeding according to schedule. Over 60% of our dermatopathology volume is now on our proprietary PathologyWatch platform. Finally, PAMA fee cuts were recently deferred and industry group lobbying for a permanent solution continues. In Switzerland, we achieved organic growth of 2% on a constant currency basis. Important to remember, there was a very strong organic growth of 6% in the previous comparison period due to respiratory illness epidemic at that time. Synergy realization in Switzerland is proceeding to plan with margin expansion achieved following the acquisitions of Synlab Suisse and the Dr. Risch Group. This includes laboratory mergers already completed in Geneva, Lausanne, Zurich and Ticino. The 2 largest mergers in this schedule for the hub laboratories in Berne and Lucerne are on schedule, including Berne in the second half of this financial year and Lucerne next financial year. And these include major upgrades to laboratory infrastructure and automation. As in Australia, we had continued strength in the specialist and hospital segments in Switzerland, including winning a new hospital contract in Zurich last month. We have harmonized core IT platforms, including our laboratory information system and ERP, standardized instruments and our logistics network, all of which lay the foundation for further integration and ongoing organic growth. In the United Kingdom, strong organic growth of 24% was driven by the Hertfordshire and West Essex NHS contract, which commenced in March with integrations proceeding well to plan. Our new hub lab in Watford is expected to go live in July, servicing the HWE contract and creating additional capacity for further growth in this important region. We continue to successfully bid for new pathology contracts in both the public and private sectors. For example, the prestigious Royal National Orthopaedic Hospital, where we commenced service for another 11-year term in November, and we won a large private specialist outpatient group contract from October. We announced the acquisition of Cellular Pathology Services, a small anatomical pathology laboratory in London, which completed in November. This creates important capacity for growth in the private AP market moving into the future. In our Radiology division, we achieved organic revenue growth of 7% with EBITDA growth of 5% once normalized for IT cost reallocation. Annual Medicare fee indexation of 2.4% occurred from 1st of July, and we continue to have an ongoing focus on higher-value growing modalities such as CT, MRI and PET/CT. 7 greenfield sites opened last financial year and a further 3 are planned for this financial year with one already completed in H1, all of which are initially margin dilutive as expected. 23 of our existing MRIs became fully licensed from July 2025 following changes to Medicare licensing. We are very proud to partner with the Australian government on the National Lung Cancer Screening Program, which has added to CT revenue growth from July 2025 and already has shown life-saving benefits for our population. We continue to invest in AI and other systems to drive productivity gains across radiology, including in CT chest scans. Finally, Sonic Clinical Services showed revenue growth of 5%, primarily driven by the recent acquisition of the National Skin Cancer Clinics and EBITDA growth of 20% off a low base. National Skin Cancer Clinics are now integrated with our existing skin business and performing well. Recent increases to Medicare funding for general practice from November are showing initial benefits to revenue and consultation numbers in general practice and increasing accessibility of general practice across our population. Within Sonic Clinical Services, a range of cost management initiatives underway, including site rationalizations and realization of operational synergies, including in back-office functions. To conclude, I'd like to discuss Sonic Healthcare's value proposition. Our value proposition is centered around our unique medical leadership culture. First, Sonic Healthcare's focus on and delivery of personalized service for doctors and patients makes us a trusted partner for doctors, patients and health care systems around the world. Respect for our people leads us to being an employer of choice, including in highly competitive specialized labor markets and creates a passion for service excellence that helps our people go the extra mile. Sonic Healthcare's company conscience is our mission to care for our global communities, making us an integral part of our communities and a critical component of health care systems. Our well-known operational excellence drives operating leverage through organic growth, efficiency gains and innovation at a global scale. And finally, our unmatched professional and academic expertise creates a leading position in highly specialized diagnostics and personalized medicine, both of which are high-growth areas in a time of rising complex and chronic health care needs. Before we go to questions, I would like to take a moment to thank our management teams and 45,000 staff for their dedicated service and commitment to patient care. Our amazing people care for our communities' day in and day out and have delivered these excellent results. Thank you for your attention, and over to you for questions.
Operator: [Operator Instructions] And I show our first question comes from the line of Andrew Goodsall from MST Marquee.
Andrew Goodsall: Welcome, Jim. Just starting with phlebotomist wages. I know you're still waiting on details there. Your competitors have given us a little bit of detail talking about the 1.8% impact in the fourth quarter. They've got variation between because of where their current EBAs are. I was wondering if you could talk to where your EBAs are versus Fair Work Commission, just talking more broadly.
James Newcombe: Yes. Thank you, Andrew, for that question. So there's a few things to unpack there in that question. The first thing is to say that we have particular strength and growth in the specialist market in Australia, and that does mean that our volume and revenue growth are less tied to collection centers than perhaps our competitors are. And we have gone through a strategic rightsizing of our ACC network, which has continued through H1 but slowed down. And during that process, significantly improved the productivity of our collection centers, including through our supercenter strategy. And then finally, we do have a higher baseline of pay for our phlebotomists, and that comes from really valuing their contributions. They're very important frontline workers for us, caring for our communities. And we've also significantly invested in their skills training and development over decades. So all of that leads to our expected impact for this financial year for the phlebotomist changes being sub-$2 million, and that includes a one-off readjustment for leave provisions. So that has been taken into account with the guidance we've just talked about. And we believe the impact is proportionately lower than competitors because of the reasons that we've just gone through.
Andrew Goodsall: And sorry, just to stick with that a little bit. Obviously, there's still the health service professionals to pick up. Are they sort of reasonably material to you? And I think that's more of a '27 impact. And just flagging overnight, I think we have a bit of crossover with an award that the Victorian government has generously made to their health services professionals of about 12.5% over 2.5 years. So just any color you can add there would be great.
James Newcombe: Yes, it's a good question. As has been mentioned earlier in the week, we don't have a final determination from the Fair Work Commission on the health professionals component of the gender undervaluation review. We know it won't affect this financial year, as you've rightly said. So we await that determination before we can model out the impact and particularly the phasing of it is up in the air. As we talked about, our industry body is in discussion with the Department of Health about possible offsetting funding options, and we know they've done that for other industries with similar changes.
Andrew Goodsall: And final one for me. Just maybe this one for Paul, but just trying to get a sense of FX impacted spot, just what that might look like in the second half, obviously, being a lot of movement in some of the key peers.
Paul Alexander: Andrew, yes, there certainly has been some movement in the exchange rates. So if we were to assume current rates prevail for the rest of the year, we certainly won't see the level of tailwind that we've seen in the first half. But we haven't sort of tried to express that in our presentation, et cetera, because the rates are moving around quite a bit. more recently. But yes, the tailwind will be less for the full year than it has been in the half based on current rates.
Operator: And I show our next question comes from the line of Sacha Krien from Evans & Partners.
Sacha Krien: Can I just clarify that answer to that last question, Paul. Are you saying that it will still be a tailwind. I think you were talking about a $70 million tailwind in August. It sounds like it's still going to be a tailwind, but a more modest one.
Paul Alexander: That's correct. Tailwind for the full year. I can just reiterate based on current rates, which can move every day, of course.
Sacha Krien: Yes, sure. My main question was just on some of the proposed German private market reforms. I'm just wondering if you can take us through some of the potential range of outcomes there. And is it fair to say this is going to be a bigger risk for you than the changes that came through for the public market on 1 Jan '25?
James Newcombe: Yes. I mean thank you for the question. And to reiterate, there really is no certainty at the moment that, that reforms of the GOA, if we're talking about the GOA will proceed. And underlying that is also total uncertainty about any timing or potential impact. These are broader changes for health care remuneration than just pathology. They have much broader implications for other health care professionals as well. And there's a political process underlying that, that needs to play out. So at this time, it is -- it will be premature to speculate on what those impacts might be.
Operator: And I show our next question comes from the line of Craig Wong-Pan from RBC.
Craig Wong-Pan: Just wanted to ask about the German and Switzerland businesses. In the slide, it talks about margin expansion. I know you don't like disclosing actual margins, but could you talk about what sort of margin expansion you've seen in those markets?
Christopher Wilks: Yes, Craig, you're right, we don't normally disclose that sort of information. And so I guess in this Q&A, we don't want to be providing information that hasn't been provided more broadly. But I think what we have said is in both of those countries that the synergies that we expected to achieve are on target for both Switzerland and for the LADR acquisition in Germany. And when we did announce those transactions, we gave some indication of where we're aiming to get to. So I think probably I'd head you back to some of those previous disclosures and our confirmation now that we're on target to achieve those outcomes.
Craig Wong-Pan: Could you remind us, when you expect to achieve those? I mean, I guess, I'm trying to get a sense of how much did you achieve in the second half [indiscernible] how much.
Christopher Wilks: Yes. Look, there are some early wins that you get from things like procurement by bringing these businesses onto our purchasing contracts. I think with LADR, we said that we would get to an after-tax ROIC of something like 11% within 3 years. That's still our plan with that one. With Switzerland, it's a bit more complicated because there's 2 acquisitions there, and they've each got kind of 3-year plans. We've spelled out in the slides a little bit about what we're doing there with mergers. Again, there's some benefits that come from procurement quite early, although in Switzerland, there needed to be some changes to platforms to achieve those. So that takes a little longer. But look, I probably don't really want to be drawn into talking about margins, but all of that's on track, and you'll see more of it flow through into the second half, which then flows into our guidance.
Craig Wong-Pan: Just second question, the sale and leaseback for the Brisbane site, I just wanted to understand why that site and yes, I guess, the potential for other ones? And what kind of, I don't know, details for that sale and leaseback, like kind of is like the time frame for that? Yes, if you could provide any color around that, that would be great.
Christopher Wilks: Yes. Look, the Bowen Hills is one of our largest property holdings. We recently just spent $80 million doing an extension to that. So it's pretty -- that finished in 2024. And the project, the sale and leaseback process will be launched early next week. We've been preparing for it. You might see some press about it next week. And it comes down to just a broader capital management strategy with properties like this. There's yields of kind of circa 5%. I think our view is that with that extra capital, we should be able to get a much better return than that. And with things like triple net leases, we can still effectively control the building. It's any repairs, maintenance. It's kind of like ownership without the capital tied up. So that's the first one. We alluded to the fact that there could be others. I think you're probably aware that we've bought the old Costco site at Docklands. So that did have an effect on our CapEx in this period because it settled on the 1st of July, circa $100 million for the site. The builders FDC are in there now. That's something like an $80 million spend between now and April, May '27. So that's another site when it's finished that we -- that might be a sale and leaseback. And likewise, with our site up here in New South Wales. So we've had a fair bit of property on the balance sheet for a while. And I guess we've made a decision that we can control them as we need to operationally without having to own them and that will provide some nice capital to hopefully drive better returns to the shareholders over time.
Operator: And I show our next question comes from the line of David Stanton from Jefferies.
David Stanton: Perhaps we could talk to the U.S. Firstly, how much is anatomical pathology as a percentage of total U.S. revenue? Would you be willing to give us that number?
Paul Alexander: David, it's about 1/3 of our U.S. revenue. So something like $400 million out of $1.4 billion-ish.
David Stanton: And what's the longer-term view of those U.S. operations? Where do you see that going over the medium to longer term in terms of the splits and willingness to earn, please?
James Newcombe: So our focus, as we've said today, is on the operating review there. There's a lot of work, really positive work going on there on that, including already completed work in terms of withdrawing from loss-making operations in Alabama, a lot of work in rationalizing those AP operations as well. Important to point out, we've got a lot of strength there in advanced diagnostics with the recent Cairo acquisition, and we're expanding that in that advanced diagnostics division, cross-selling that in our geographic regions and markets to make sure we get this more national penetration of that offering, and it really is market-leading what we offer there in those areas. So there's a lot of opportunity for top line growth there. The digital pathology rollout is really successful and a positive thing, not just in terms of quality of the medicine that we deliver, which is, of course, really critical in terms of particularly the AI tool with PathologyWatch, but also workload optimization. It's a great marketing tool as well to enable dermatologists in the U.S. to themselves see the slides virtually through the PathologyWatch platform. So we're seeing a lot of really good success there. And again, just to go back to the organic growth, we've reported at 0% constant currency, but the underlying organic growth is still at 2%, and that's after adjusting for that Alabama major payer contract loss and the restructuring costs that we're doing there, and we expect that will continue to -- in terms of the impact of those changes, we'll continue to see improvements in terms of margin impact moving forward. So we're invested in that operating review and moving forward on that basis.
David Stanton: Understood. And I guess moving on to radiology, which I must admit I don't ask about that often, but organic revenue growth of 7%. But I do note that Medicare is talking to -- with a caveat here, review, Medicare is talking to a growth of 9% in the Medicare market in the 6 months. Firstly, where do you think you'll -- are you growing in line to above market? Or -- and if not, is it because the MRIs, you have less MRIs, as a percentage of total revenue in that space than perhaps your peers?
James Newcombe: So we have seen strong growth in MRI revenue as well, and we'd say that 7% is in line with long-term growth rates for the industry. And we are, as you would know, cycling much stronger organic growth in recent years. So we still see a lot of positivity. We believe the change in MRI licensing has effectively grown the market and not impacted our business negatively. And as I said, we actually are growing in that space as well.
David Stanton: Understood. And would you be willing to give us some CapEx guidance then, Chris, for the full year, please?
Christopher Wilks: Yes. Look, in answer to a previous question, I've mentioned a few things. So our CapEx for this year was higher than the PCP, mainly because of property-related costs, the Docklands acquisition, which I mentioned, also some costs associated with building out the Watford facility for HWE in the U.K. and some of the Swiss lab work as well. I think in the second half, there will still be some effect from property, particularly the build-out of Docklands. So over the course of the next 6 months, I don't know exactly know what that is, but it's probably $20 million, $30 million, something like that in the next 6 months. But underlying CapEx, if you adjust for those properties, those property transactions, underlying CapEx is kind of growing at about the rate of the growth of the business. So I think that's probably the -- that's it in a nutshell. And I think going forward, as we alluded to with the focus on some sale and leasebacks, the property cost side of things will probably start to in future years drop off a bit, and you probably get a bit more transparency on the underlying CapEx, the maintenance CapEx, if you like.
David Stanton: Understood. Sorry, just a follow-up just to make it clear for me. So first half is going to be slightly above second half, it sounds like in terms of CapEx, , total CapEx.
Christopher Wilks: Yes, quite a bit above because it had the $100-plus million for the purchase of the Docklands site.
Operator: And I show our next question comes from the line of Laura Sutcliffe from Citi.
Laura Sutcliffe: One on the U.S. to start with, please. You mentioned you're expecting margin improvement in the second half and you've mentioned a few things connected to that. But is that expected improvement mainly driven by the closure of the anatomical pathology centers that you've mentioned? Or are some of those other factors material? I'm just keen to understand the scope of the review in the U.S. and just to confirm that it's an operational review rather than a strategic review, where you might consider divesting all of the U.S.
James Newcombe: Yes. Thank you for that question. There's a bit to unpack there. I think the first thing to say is that we it is indeed an operating review of the U.S. operations, and that's our focus. In terms of the particulars, what we're talking about is less -- what we've unpacked in that slide in the presentation today is a decrement in margins impacted the group margins. And I think for not just for the U.S., but for the other points listed in that slide. And the point we really want to make there is to really expose just how strong the majority of our business is in terms of operating leverage that we are exercising and that we are -- we have grown adjusted EBITDA margins of 30 basis points in the majority of those operations outside of those adjustments. Looking at the U.S., what we're -- the point we're trying to make is that the decrement moving forward is expected to be significantly less because of that work that's been done in Alabama, and that's not just AP in Alabama, it's pretty much all operations because of the loss of that major payer contract loss. Two of those AP practices were in Alabama, but 7 were not. And the important point to make there is that there may be some closures there, but really, what we're doing is rationalizing moving that work to other centers and retaining the top line as much as possible, whilst doing the cost control at the bottom. So that will have significant benefits to margin, as you would expect. In terms of the top line, we are seeing great growth in the Advanced Diagnostics division that's really driving top line growth and margin growth. So they're all important. They're all reflective of great discipline in our management teams. And the operating review is widespread. We're telling you today about some details, which have happened and are happening. So you have some detail around that, but it is across all U.S. operations as we've advised.
Laura Sutcliffe: And if I may, one on the possible buyback that you've mentioned. Would you plan to put most of the cash from any property transactions that you could achieve towards a possible buyback? And if you don't know, what are the main decision-making factors for defining that?
Christopher Wilks: Yes. Good question, Laura. Look, we haven't come to a landing on that, and that's something that would need to be discussed with our Board, obviously, once that transaction has completed, but that's a possibility that the majority of that could be used for that purpose. But as things unfold, there might be -- we mentioned some of the prior capital management priorities. There might be acquisitions that we're considering that might change our view on the scale of a buyback. So it will be considered at the time when the cash is in the bank. And -- but we just thought it was worthwhile letting the market know what we're planning with this because it will become public about the sale pretty quickly and to let people -- let the market know one of the thoughts we had in terms of the use of the proceeds. And balancing the investment-grade structure of our balance sheet is also important. And I think our gut feeling is that with what we're expecting in the second half that we're going to be in good shape on that front. So it should probably free up that capital for the purpose we've mentioned.
Operator: And I show our next question comes from the line of Davin Thillainathan from Goldman Sachs.
Davinthra Thillainathan: Jim, maybe a question for you to start off with. Clearly, you've made some changes here with the U.S. review property sale and leaseback changes as well. But curious sort of what other observations you've perhaps come out with having looked at the business as CEO over the last few months?
James Newcombe: Yes. Thank you for that question. I think the first thing to say, which is remarkable is that going around and meeting people and seeing our operations around the world, just how strong our medical leadership culture is and what a great competitive differentiator that is. I think so much of our value medically comes from our values internally and our culture, which drives this incredible contribution we make to our communities around the world. And it really is kind of humbling to go around and see the amazing work that we're -- that all of our staff are doing for their communities. And building on that, really, our focus has to be -- has always been and has to be continuing delivering that high-value medicine, and that will drive continuing financial value and shareholder returns. I think as long as we're focused on that and looking after our people and looking after the medicine, the rest will flow. But we are prioritizing margin accretion, as we mentioned at the AGM, which, of course, will drive EPS growth and improve return on invested capital. We've talked a lot today about the work that -- some details about the work ongoing in that area, which is really exciting and promising, and I've seen it firsthand in going into the operations that we're realizing the synergies from the past acquisitions, that we're having great organic growth. We're partnering with governments and other health care systems around the world in a really positive way. And we're focusing on that operating leverage, which I think has been the cornerstone of Sonic Healthcare's success through cost control and a focus on innovation. And you mentioned capital management, and again, that's -- we've talked a bit about that today. I think that's very important to understand that we have a very disciplined focus on capital management and looking at maximizing shareholder return through that capital management strategy as well.
Davinthra Thillainathan: And my next question is -- if I look at the EBITDA margin -- sorry, EBITDA guidance for the year, consensus numbers would suggest you would land towards the top end of that range. Can you perhaps sort of help us understand what drivers we should be thinking about from a half-on-half split for that guidance range, please?
Christopher Wilks: Yes. Look, we don't want to put too much more detail into the guidance that we've already given. But I think you're probably well aware that there's a seasonality to our business, particularly with our Northern Hemisphere operations, where the summer period is fully in the first half. And so look, I probably don't want to add too much more than the detail we've already given. We've given a bit more below the EBITDA line, some more detailed guidance on depreciation and interest. than we had -- have in the past. But look, we remain confident that we should be in for a solid second half with the various initiatives. Jim has talked about some of the stuff that's happening in the U.S. Australia is looking very solid with its growth rates and some of them move to some private billing. So I probably don't really want to add any more than what we have given. Otherwise, we'd be changing the guidance we've set out in the deck.
Paul Alexander: Certainly, the biggest factor in terms of where we might end up within our range is, as usual, organic growth. If we see even stronger organic growth in markets, then that has -- the operating leverage will add that to the bottom line. And so that's probably the biggest swinger, if you like, in terms of where exactly we'll end up across the different markets.
Operator: And I show our next question in the queue comes from the line of Steve Wheen from Jarden.
Steven Wheen: I just wanted to go back to the U.S. At the time when it was originally raised that the Alabama contract was going to be lost. It was indicated that New Jersey was a potential offset to that. Just wondering what has played out within that state and whether you are actually seeing some offsetting factors there from that payer contract?
James Newcombe: Yes. Thank you for that and for raising New Jersey. So we have won that contract, as you pointed out, and we're really excited about the growth in that quite large state, which has a fantastic location in terms of our operations there already with a lot of automation there that's looking for -- that can handle increased capacity. So our local teams are really focused on that in the Northeast. We have a lot of business development efforts going on, particularly in the northern part of the state that we're excited about. So it's absolutely a focus there, and we're building up to move strongly into that state based on that contract win.
Steven Wheen: Can you give us an indication as to timing when we might actually see some benefit from that?
James Newcombe: I think it's fair to say that we can't expose more at the moment in terms of exact timing. I think we just have to say that, listen, it's a real focus. We're seeing some early gains there in terms of contracts, but I can't give you more detail around that at this point.
Christopher Wilks: Pretty fair to say, Jim, that it will take a little time to build up. One is lost immediately. The other one takes some time to build up. So it will take a little while before there's an offset there.
Steven Wheen: Second question was also in the U.S. And again, just sort of going back to earlier sort of commentary, there's been a fairly strong expectation that the revenue collection system was going to generate USD 20 million to USD 25 million of earnings benefit, which you're now, I guess, going a little bit more cautious on since the review. Just -- if you could help us understand why you're backing away from that guidance and what the issue is? And is this something that's even longer dated or it's just not going to happen?
Christopher Wilks: Look, it is happening, Steve. It's taking a bit longer than we'd expect, and some of the benefits are offset by some other little changes that are happening in the market that affect PPA as well. So the team -- we just spent some time over there a few weeks ago. The team is working with -- it's a product called [indiscernible] that I think we've probably mentioned before to work out the best ways to continue to push those benefits and optimize them. It's quite -- it's not just a matter of using the software. It's a matter of us setting up customer portals and directing patients to those portals. So information is made available more easily. So it's quite an implementation process, and it's probably just taking in our biggest lab, CPL, which was the last to go live. It's taking a bit longer than we thought. But we still remain optimistic that, that sort of benefit will ultimately flow through, but it will probably be more into '27 than what we're hoping was going to be into '26.
Steven Wheen: So we're not -- that's not part of the reason why you've got expectations of a stronger second half in '26. I just --
Christopher Wilks: It's a little bit of -- but I think there's lots of initiatives. There's multiple initiatives that are happening. Even the acquisition of Cairo, which is performing well, we'll own that for the whole second half. So that will be contributing to the second half performance as well. Growth in ThyroSeq, there's multi factors that probably give us confidence that the second half should be reasonably strong.
Steven Wheen: Just while I got you, I wonder if with this sale and leaseback focus, I'm just curious as to [ your thoughts ] on what you're anticipating with regards to the terms of those arrangements. what that will do to the AASB 16 accounting for rent in FY '27. Is that likely to change the depreciation and right-of-use asset interest costs?
Christopher Wilks: It's a good question. It's -- in terms of the --
Paul Alexander: The short answer is yes. I mean, clearly, part of the sale and leaseback is that we're taking on a significant lease in the case of the Bowen Hills one --
Christopher Wilks: It's pretty -- it's circa $25 million is the rent. But I think the way we'll be structuring it is that I don't think there's not going to be an adverse impact on the AASB 16, but there will be more cost than we're currently paying because we own it now. And so there's just the interest associated to the cost. So there will be an impact going through that effect. But then we'll have the benefit of a chunk of money in the bank as well. So there's offsetting benefit.
Steven Wheen: Yes, that's clear. So roughly, we'd be anticipating $25 million for that lease alone potentially being a delta shift in depreciation and interest in FY '27?
Christopher Wilks: The way AASB 16 works is that in the early years of a lease, your actual expense through the D&I lines is higher than the rent you pay. It obviously evens out over the period of the lease. But initially, the impact will actually be higher than the [indiscernible].
Operator: And I show our next question comes from the line of Andrew Paine from CLSA.
Andrew Paine: Just coming back to previous guidance that you had, I think, at the AGM where you were talking about a 45% to 46% split for EBITDA in the first half. Just wondering if that's still the case? And is that in relation to constant currency or reported expectations?
Christopher Wilks: It's definitely on a constant currency basis. That's the basis of all of our guidance. And we said at the time, approximately 45%, 46%. And if you work on either of those 2 numbers and the result from the first half, you'll get a constant currency number that is within our guidance range. So yes, probably not much more to say.
Andrew Paine: Could I also just ask about -- I know you've touched on it, but the FX there. And just you mentioned before it will still be a tailwind for FY '26. But does that mean it's flat or negative or a little bit of a tailwind in the second half? Are you able to give any insights there?
Paul Alexander: It's -- you can look at the rate -- like we've given you the rates in the first half. It is a headwind in the second half, which is why the tailwind for the full year will be less than the tailwind in the first half if rates continue, where they are today.
Andrew Paine: And just on depreciation and interest, are you able to give us an indication of the magnitude of the FX there as well?
Paul Alexander: We -- again, you can look at what's happened in the first half, and we obviously do have our natural hedge in place, where our borrowings are largely in the currencies of our operations. And so the effect of the FX at net line is significantly less than at revenue or EBITDA, but we haven't given any specific numbers around that. So I probably can't help you too much further.
Andrew Paine: And just on the Swiss acquisitions, I know you didn't want to get drawn into margins around these businesses. But just keen to know how far you have progressed in terms of the integration of those businesses there. I believe you said there was a 0% margin business or acquisition to begin with. So just really trying to understand the ramp-up and the ramp-up into our outlook and get a sense of if you're a quarter way there, halfway there or further progressed in terms of that contribution to margin?
James Newcombe: So yes, thank you for that. So the -- I think we said at the time that we would like to see the EBITDA margin heading towards 20% over 3 years for each of those acquisitions, and we are tracking to target on that. That's the 3-year time frame as advised and everything is proceeding on track.
Andrew Paine: Are you able to give us -- are you halfway there or more? Or you want to be drawn into that.
James Newcombe: I think it depends on the acquisition. So I mean, Chris alluded to earlier that there's not a totally linear process. It's punctuated as well as probably weighted forwards rather than towards the front rather than the end. So it's really hard to give you that total detail. But in terms of the broad analysis of it, we're tracking to target on track for that 3-year time frame for each of those acquisitions. And we've given you some detail today about some punctuations in terms of lab mergers and new hub labs, which will be important on that journey.
Christopher Wilks: I think maybe just to add, Jim, that we mentioned in the slide that the 2 biggest mergers are still yet to come. So you probably appreciate that that's probably where you're going to get more bang for your back out of those larger mergers. And so there's one in late in the second half of '26. and then in '27. So there's still a bit of a journey to go.
Operator: And I show our next question comes from the line of Lyanne Harrison from Bank of America.
Lyanne Harrison: Thank you very much for solid result today. I was wondering if I could come back to the United States, 2% organic growth there. Do you think that's reflective of the market? And also with some of your initiatives that you have in place in the United States around operating review, do you think you could grow ahead of that for the second half?
James Newcombe: I think -- thank you for that question. And of course, our focus is on driving organic growth. We do have a lot of -- in the U.S. and across the business, we do have some tailwinds, as we mentioned, in terms of our Advanced Diagnostics division, which is performing really well and the dermatopathology division. So it's -- we're not forecasting to organic growth, but certainly, we'd like that to grow over the 2%. And the efforts that we're making both at top line, in particular, will, we think, drive that.
Paul Alexander: I think it's probably worth mentioning that Quest and LabCorp sort of quote larger organic growth numbers, but we don't know for sure, but they also do quite a lot of hospital deals. And I think there's some aspects of those that find their way into organic growth that it might be the specialist referral testing and the like. So I don't think to the extent that you're looking at some of their growth numbers, you should think of that as necessarily the market growth.
Lyanne Harrison: And if I could come to Australia, 5% organic growth, that was certainly ahead of your peers, they reported this week. Can you comment on your pathology trading to date? I know some of your peers in their results commented on maybe some softness in January. Are you seeing the same thing? Or are you seeing solid growth through the first part of this half?
James Newcombe: Well, I think we have -- we're very, very happy with the organic growth that we've seen. There's nothing to change in terms of that story that we can see. It does come, we believe, from a few different initiatives, which are really bearing fruit. I think at base, it's the fact that we are focused on the quality of the medical diagnostics that we deliver, and that's a true competitive differentiator. But it also comes back to our logistics and operational excellence. Our collection center network and particularly that focus on supercenters in terms of a great patient experience has been a real differentiator in the market. And so, we continue down that strategy. But that specialist market growth, we talked about the hospital market today and our partnership with Ramsay at -- in Perth is really exciting. And that's a real trend that we're seeing continuing and not slowing down at all. In fact, the opposite. So we're excited about that because we're focusing on that high-value medicine, and that's really delivering that growth that we're confident about into the future.
Operator: And I show our next question comes from the line of David Bailey from Morgan Stanley.
David Bailey: Just a very quick one for me. Paul, you mentioned those currency impacts. If I run the average of the second half, I'm getting an EBITDA headwind of $20 million in the second half. If I run spot, it's about a $35 million headwind. So can you just confirm for the full year, we should be thinking of an FX impact to EBITDA in the range of flat to maybe up [indiscernible].
Paul Alexander: We're not guiding to that. So I won't be drawn on a precise number. You've done the numbers yourself.
Christopher Wilks: I think those are a bit overcooked. I think --
Paul Alexander: Well, I don't know what today's rates are.
Christopher Wilks: I guess, it moves around. But if you're using today's rates or the last few days rates, I think that sort of headwind for the second half is a bit more than I think we were thinking.
David Bailey: But just to be clear, it's a headwind in the second half versus a benefit of [indiscernible] in the first half.
Paul Alexander: Yes.
Christopher Wilks: Yes. Correct.
Operator: And I show our next question comes from the line of Saul Hadassin from Barrenjoey.
Saul Hadassin: Just a quick question for me as well. The revenues that you generate in Germany, can you remind me what percentage is now funded through EBM versus the GOA?
Paul Alexander: So the GOA represents about 30% of our German revenue with the EBM more like 40% to 45%. And then the balance is a bucket, if you like, of work where we can effectively set or negotiate prices, hospital outsourced contracts, clinical trial works, work we source from outside Germany, et cetera. So that's kind of the split.
Saul Hadassin: Sorry, Paul, you're a bit soft when you mentioned the GOA percentage. Can I just check what you said there for GOA?
Paul Alexander: About 30%.
Operator: And I show our next question comes from the line of David Low from UBS.
David Low: Jim, you commented on the Fair Work Commission and talking with the government. I mean, the impression I got from your answer was that you're pretty confident that the government will step up and help fund the additional wage pressure. Just wondering whether that's the right interpretation.
James Newcombe: Thanks, David. Listen, I think that the -- these are good faith discussions. It's positive that there's engagement there from our industry body. I can't speculate about outcomes. I think it'd be very premature. We are focused on doing the right thing by our employees, always have been and we'll continue to do so. We are focused also on the high-quality medicine and sometimes that will require increased funding in order to deliver that. So we're making those points. But at the moment, they're just good faith discussions.
Christopher Wilks: I think you alluded to the fact there were some precedents in aged care and child care, but whether or not that's relevant, who knows? Time will tell.
David Low: Would you care to put a time frame on it? I mean, you said it's premature at the moment. I mean, are we talking about this budget coming up?
James Newcombe: I honestly can't say. We're not -- personally in those discussions, they're being led by Australian Pathology, which is our industry group, and I think it would be unfair of me to speculate on those.
David Low: But the wage pressure come through pretty much back end of this financial and into next year. So frankly, if you're going to get -- if the industry is going to receive it, presumably, it needs to come in FY '27 for not to lead to that reduced quality of medicine that you've spoken about.
James Newcombe: Yes. I mean that's the facts of the Fair Work Commission decision. We know the phlebotomist change comes in from 1 April and it's phased through 1 January next year. And then the facts as they are is that the health professionals is likely to come in on 1st of July this year and then be phased in an unknown way. So we do have some uncertainty still around that, as we mentioned, in terms of the timing and impact. But absolutely, the initial impact that we know of is going to happen this financial year, and we've quantified that. So yes, it's something which we're keen to progress, but I can't comment on how that's progressing.
David Low: Just changing topics. Slide 5 sets out 140 basis points of headwinds, can I need to talk to what we should expect second half go forward? I mean, which of those items is going to no longer be a headwind? I think in particular, the U.S. looks like a 350 basis point or margin hit roughly on my numbers, but some of it's restructuring. So it's a little hard for me to unpick what's ongoing and what's perhaps really weighted towards the first half.
James Newcombe: Yes, it's a great question, David. So we can go through them in turn. Clearly, acquisition costs were particularly high in H1 because of the LADR acquisition, in particular. The German KV quota change is cycled through. So we don't expect any margin decrement in H2. The LADR acquisition, we've talked about some of the great synergy realization work that we're doing and there's improvements in margin there. And similarly, with the Herts and West Essex contract. So in the U.S., we've unpacked a lot today about what we're doing there. So all of them, we expect to improve in terms of the year-on-year margin decrement. I'm not sure if Paul or Chris, you want to comment.
Christopher Wilks: Yes, that's a good summary.
David Low: Can I just push a little bit more on the U.S. because given there's a restructuring charge, are we going to see restructuring charges in the second half? Or is that done?
James Newcombe: Yes is the answer to that. There is still work to do there that we're working hard to do. And so there will be some restructuring costs in H2.
Paul Alexander: But it's probably fair to say de minimis in the scheme of Sonic so.
James Newcombe: Yes.
Paul Alexander: It's a few millions rather than anything more significant.
David Low: And that could commence on the first half or just on the second half?
Paul Alexander: That's the second half.
Operator: And I show our last question in the queue comes from the line of Sacha Krien from Evans & Partners.
Sacha Krien: Look, I just got a question on the balance sheet. It looks like net debt, excluding lease liabilities, is come in a fair bit above market expectations, and it looks like it's working capital and CapEx. I think you touched on the CapEx question. But if you could maybe remind us what you think maintenance CapEx is for the business mix you now have? And then also address the big step-up in working capital as a percentage of sales, if there's anything that might reverse out there? Or is that just the new business mix?
James Newcombe: Just maybe on the maintenance question. Look, I talked a bit about it in answer to a previous question, but I think the maintenance percentage of revenue, maintenance CapEx percentage of revenue ignoring properties is probably kind of somewhere between 3%, 3.5%, excluding intangibles as well. So that's probably kind of a little bit of a rule of thumb without excluding any property investments. Just your second part of the question, just remind me.
Sacha Krien: Just looks like -- it just looks like working capital has stepped up and really on a big decent decline in payables. Just wondering if there's something that's going to reverse there? Or is that the sort of new normal?
Paul Alexander: Yes. So there are -- obviously, we've had the growth of the company, including the addition of LADR. But the other thing, and you'll see some discussion about this in the 4D in relation to cash flow, there is this Change Healthcare issue that is ongoing in our U.S. business, where Change Healthcare, which is an outsourced billing and payments provider that we use for a large part of our anatomic pathology business and in fact, has some connections with our clinical pathology business as well in the U.S. had a cyber breach way back in February 2024, which meant that parts of our business were unable to bill and/or collect revenue for a very extended period of time. And so, our debtors balances and to some extent -- and so Change Healthcare and its related parties loaned us funds to offset that loss of debtors collections and those advances are sitting as a liability in our creditors. We've repaid part of it, as you'll see in the commentary, but we've still got some sitting there. And our debtors balance is still inflated in relation to that. So we think that situation will resolve itself by 30 June, but that is an issue affecting the balance sheet at the moment.
Sacha Krien: And do you think that's still a drag on the organic growth of the U.S. business, that Change Healthcare issue?
Paul Alexander: There's no doubt it upset our referrers during that period when we couldn't bill. And so patients would get a bill late and they'd be upset by that and they complain to their referrers, et cetera. So it hasn't been helpful that that's true, but we're probably moving on from that now.
Christopher Wilks: We've pretty much cycled collections and the effect that, that would have had.
Operator: This concludes the Q&A session and today's conference call. Thank you all for attending. You may all disconnect at this time.