VanEck Indonesia Index ETF Price & Performance (IDX)

Thank you very much, Drew. Good morning, everyone. My name is Ian Kadish. I'm the Chief Executive and Managing Director of Integral Diagnostics. I'm joined this morning by Craig White, our Chief Financial Officer. We're pleased to be talking to you this morning about the results for IDX for FY25 H1 and also regarding our outlook for the company. Turning to our page on values. Integral is a values driven company. We always put our patients first. We have excellent average patient net promoter scores of plus 83 in Australia and plus 79 in New Zealand. We serve more than 600,000 patients in the half and perform more than 1,300,000 exams at IDX prior to capital. We also invested $26,900,000 excluding capital expenditure, including $14,800,000 in growth initiatives and this compares to $3,500,000 in the prior comparable period, so a significant increase. We have three sixty two reporting radiologists including capital. This includes 200 employees and 162 contractors. We also have 2,807 total employees across the two companies. We have demonstrated continued improvement in our engagement scores and our temperature check and pulse surveys that we send out to employees and we continue to focus on our ESG strategy in accordance with regulatory requirements.

We completed our merger with Capital Health on the December 20 and we're on track to deliver projected merger synergies of at least $10,000,000 and the majority of which will happen in the first year are happening in the first year post merger. We currently have 8,777 shareholders as of thirty one December. We're executing a very structured program to combine both RDX and capital teams to create the one team almost a textbook program focused on uniting us being better together. Our board and our management team have visited 28 IDX and capital clinics in the past six weeks on the back of the OneTEAM merger integration program. We've also held board management and radiologists dinners that have included more than 90 radiologists across all the regions where we're integrating with capital, so both capital and the integral radiologists. Turning to the financial highlights. We've demonstrated solid revenue growth of 7.8% and operating EBITDA growth of 8.2% and a strong operating net profit after tax growth of 31.9%. This is on a standalone basis. We've also increased our free cash flow by 22.7% and importantly increased our operating diluted earnings per share on a combined basis by 14.2% to $0.036 per share.

Our net debt to EBITDA on the December 31 was 2.8% and is 2.6% when you include the projected synergies. This compares to three point zero in the prior comparable period. Our operating EBITDA margin reflects our non clinical labor cost being contained at approximately half the revenue growth and overall IDX corporate costs reducing in absolute terms by about $1,300,000 compared to the first half of last year. However, this margin was adversely impacted by continued clinical staff shortages and labor cost inflation, especially in two regional areas, driving our labor costs to be higher than expected in those regional areas. The group has declared a fully franked interim dividend of 0.025 per share, which is the same amount as what was declared in the prior period. Moving to the industry growth rates that we've seen from Medicare. So, the chart on the next page shows the industry growth in terms of benefits paid by Medicare on the top line and the services provided, the diagnostic imaging services provided on the bottom line on the chart. And the two charts continue to diverge as they have in recent years because of the increased number of higher value added tests that are done relative to the basic X rays and ultrasound.

This is a trend that we see across the world. It's a trend that we do expect to continue and it's a trend that IDX is placed very well to take advantage of. The trend did impact us a little in terms of the CT reduction that occurred on the 11/01/2024 in that CT's Medicare reimbursement for CT was reduced by 2% on January. And we are over indexed with CT because of our overweight higher acuity modalities, which means we're around 40% CT revenue as a percentage of total versus about a third for Medicare overall, which means that we were a little more impacted by that reduction in November than what the industry was. But it also positions us well for things like the CT lung screening program, which will happen later in this calendar year on January. Turning to the page and shareholder returns, you'll note that our EBITDA there of 46.2 includes a start period of about ten days when capital are included in our numbers, which reduced the numbers slightly because of that period being the Christmas New Year period. But you'll see that earnings have consistently increased each half since financial year 'twenty two, and we've maintained our dividend constant since financial year 'twenty three.

I'm now going to hand over to Craig to take him through some of the more detailed numbers.

Thanks, Ian, and good morning, everybody, and thanks for joining the call. I'll take you to Slide eight in the investor presentation. Ian has already called out a couple of these numbers, but I want to just focus first of all on the standalone IDX operations and then I'll comment briefly on the consolidated result inclusive of capital for the short period following the merger. So revenue overall across the group grew at 7.8% on a standalone basis, which was solid. The operating EBITDA grew slightly stronger at 8.2%. And as Ian has already talked about, the margin was expanded slightly was constrained by the some of the clinical costs in two regional areas in particular, where we saw strong growth and effectively had to service that with a higher cost to serve patients. If you look down to the operating impact line, operating impact growth was strong on a standalone basis at 32% as was free cash flow at roughly 23% with good free cash flow conversion prior to replacement CapEx of around 89%, which was up on the prior year of around 75%. Just turning to balance sheet, the leverage as Ian referenced was reported 2.8 times, but if you adjust for the $10,000,000 of synergies from the merger that we are confident will be achieved within the first twelve months of the merger, that leverage ratio comes down to 2.6 times, which is in line with expectations and below where it sat at thirty one December twenty twenty three.

Just looking briefly at the consolidated results, it does include the capital results for the stub period from twenty December to thirty first December post merger implementation. And you'll see there that effectively capital contributed $3,500,000 in revenue for that period with an overall operating NPAT loss of $1,000,000 And that was just a function obviously of the slow period through the festive season in a business that's obviously got a lot of fixed cost. I'll just draw your attention to the fact that we have provided some pro form a numbers for the full six months for both the IDX and capital on slides twenty six and twenty seven of the presentation. Just looking at revenue on Slide nine, a little more detail. The overall 7.8 growth, if you break that down, we saw 8.4% growth in Australia as a headline or 6.7% adjusted for working days, which was below Medicare for the various reasons that Ian's already discussed. I won't go through those again. Average fees per exam rose nicely by 5%, reflecting both Medicare indexation and also just the continued move in mix to higher value modalities like CT and MRI. And in New Zealand, we saw operating revenue growth of 6.6%, slightly higher when adjusted for working days at 7.4.

Just turning to operating expenditure on Slide 10. We did see operating expenditure overall reduced by 10 basis points, obviously a number of contributors to that. If you look at consumables, we were twenty percent twenty basis points lower. That reflects both some procurement savings on an IDX stand alone basis and also just modality mix through the six months with slightly lower contribution from pet during the six month period. As we've already talked about labor costs were 80 basis points higher fundamentally on the clinical staff side in particular these two regional areas that Ian's referenced. And that was despite the fact that we actually have been very disciplined on the non clinical side of the business with labor costs only growing at roughly half the revenue growth rate, a little over 4% in line with expectations. And we have overall at an IDX corporate level reduced absolute costs by $1,300,000 across six month period relative to the PCP. Equipment costs largely in line with the PCP. Occupancy costs came down slightly, just a function of lower CPI increases with the higher revenue increases and we had a couple of short term leases that were ceased. Our IT costs increased by about 20 basis points and that's just a function of the ongoing spend and investment into cybersecurity and other IT systems.

And other costs overall decreased by 60 basis points, again, coming back to that point I was raising earlier around focus on containing costs across the business. Turning to slide 11. On the balance sheet, I've already called out the fact that leverage is at 2.8 times or 2.6 times adjusted on a pro form a basis. Net debt ended at about $299,000,000 up from $210,000,000 in the prior half and that was just a function of the assumption of the debt from capital following the merger. As many of you would know at the time of the implementation of the merger, we also refinanced the financed the group's debt facilities and put in place a new enlarged facility that provides us with significant liquidity headroom. And we currently at thirty one December, twenty four have about $139,000,000 available under the group facilities, subject of course to compliance with covenants. I think that's the main point I want to raise on the capital side of things. Turning to Slide 12, cash flow, I called out earlier that free cash flow growth of 23% and conversion of roughly 89% was strong, driven by an improvement in working capital half on half.

Turning to capital expenditure on Slide 13, you can see that overall across the half, CapEx was around $26,900,000 Obviously, ongoing investments into replacement capital required to meet capital sensitivity requirements, but notably growth CapEx was up significantly versus PCP at 14,800,000 versus $3,500,000 in the prior half period. And that largely reflects investment into new sites at both Ocean Grove in Victoria, Smith Street on the Gold Coast and Noosa on the Sunshine Coast. And we have yet to really see the benefits from a revenue growth point of view flowing from those new sites, which we would expect in the second half and going forward from there. I'll pass back now to Ian just to cover off a number of important updates in the regulatory environmental space.

Thank you very much, Craig. There's a very positive regulatory climate for radiology going forward and specifically for companies with scale positioned the way that we are. From January year, any practice that holds a current license with a full or partial will receive a practice based license that provides full Medicare eligibility for all MRIs at that practice. What that means is for companies like us with 16 partially licensed magnets across the country that every one of those partially lost magnets would be upgraded automatically to a full magnet on January. And in addition, all MRIs that are on a site that has a full or a Bosch license machine gets access to a full Medicare rebate. So, specifically, if we look at sites like Imaging Olympic Park, one of the world's leading sports diagnostic imaging centers. We currently have one full license and one partial license at Imaging Olympic Park. We're in the process of constructing now to be ready within the next month or two another MRI at that site. So, by January this year, we'll have three MRIs, three fully licensed MRIs operating at that site, a site that already has the two MRIs at the site operating at capacity.

And one of those has a partial license, only one is a full license, which means that we'll have three full licenses at Imaging Olympic Park. Similarly, at the site we have in the Brisbane CBD at the Queen Street Mall, we have a partial license at that site that becomes automatically fully licensed on January. So we'll have access to the specialists in that region as well as DPs because the difference between a full license and partial license is that the full license gives us access to the specialist market, whereas the partial license only allows access to GPs with the very limited specialist access. The additional change that will happen from 01/2027 is that all MRIs at that point become fully licensed. But the change that has been promulgated by Medicare over the next few years is a sensible change and that it allows the market to gradually move to a fully deregulated state and it allows those that do have licenses full and partial licenses in particular to continue to benefit from those licenses over a two year period and it prevents the kind of arms race that would otherwise occur for MRIs in the absence of that.

On one November of last year, Medicare reduced benefits for all CT services by 2% and as I mentioned previously because we are over indexed to CT, it did disproportionately hurt us. But it does position us well for the national lung cancer screening program, which is outlined as the next point on Page 15. This is a program that will utilize low dose chest CPs to screen for lung cancer in asymptomatic high risk populations, including all smokers and ex smokers. It's a program that has been QC successful overseas, saving lives for patients and also being materially beneficial to overseas radiology operators, particularly in places like The U. S. And Canada where the program has been very active. This program begins at January this year. Government has committed $264,000,000 over four years to the program and we would expect to be able to obtain to service more than our market share of that $264,000,000 over the four years. Medicare also announced just this last weekend that the federal government will be investing $7,900,000,000 to increase the bulk billing incentive for all Australians and to move the bulk billing rate up to target rate of about 90%. This is very beneficial for general practitioners, but it's also beneficial for companies like ours because as more patients CGPs, more referrals will also occur to radiology providers like ourselves.

We'll also see more referrals to specialists, which in turn also will generate additional radiology referrals. Moving to the next Page 16, and the New Zealand regulatory environment has not seen much in the way of changes or indexation. We have seen importantly more radiologists and other clinicians moving into both countries. And as overseas international medical graduates come into Australia, they are required to work in regional areas, which will help us for ten years, which will help us alleviate the regional shortage. And importantly, the Australian Health Practitioner Regulatory Agency or EPRA has implemented has planned to implement an expedited accreditation process for radiologists, a similar process that they already have in place for other medical specialties, including anesthesia and psychiatry, which will allow internationally trained radiologists from designated countries like The UK and Ireland to come into Australia. And this will help alleviate the skill shortage, particularly as I say in the regional areas because these radiologists will be practicing in regional areas for ten years after coming into the country. Moving to our strategy, Page 18. We will continue to drive organic growth including through continued focus on some key operational improvement initiatives. We'll also be accelerating our use of kedi radiology and digital and AI to improve the patient and their further experience and doctor efficiency.

We'll continue to drive our ESG strategy and to lead through our values. And right now, we're working on the post merger integration with capital, which will include the realization of at least $10,000,000 of projected synergies, the majority of which will be in the first year of post merger integration. The strategic merger and acquisitions remain a key component of our strategy going forward, even though our focus now is on the integration piece. The company believes that the fundamentals of radiology remain strong. Our industry benefits from being at the confluence of major trends. Demographically, the aging of the population and increased prevalence of chronic disease and early detection is going to continue to drive demand for radiology services. And technology advancements like digitization and the growth of TEDI radiology and AI will improve the quality and the efficiency of the care that we deliver. And we expect to see the structural shifts to higher value modalities like CT, MRI and PETCTs continue. In FY 2025 and beyond, we're focused on executing these drivers of IDX's strategy to grow our business. We also remain focused on the key operational improvement initiatives, which are expected to improve our operating EBITDA margin over time.

And then following the integration of Integral and Capital following the merger of twenty December twenty four, the merger is progressing well and as indicated a few times, we are on track to deliver at least $10,000,000 of annual pretax net cost synergies in the majority of the first year. Going forward, RDX is also positioned to benefit from further deregulation of MRIs and from the introduction of the National Lung Cancer Screening Program. Both of these are material developments for the industry where RDX is ideally placed to benefit from them. To benefit from them. In financial year 2025, replacement and growth CapEx is expected to be about $60,000,000 to $65,000,000 including $20,000,000 relating to capital.

Your first question comes from David Stanson, Jefferies. Please go ahead.

Thank you very much, Tim. Good morning and thanks for taking my questions. If we could start sort of near term, I wonder if you could give us some ideas about how you can control those clinical staff costs going forward. What can you do to sort of control those costs? Thanks.

Thanks, David. The most immediate and near term lever we have at our disposal right now is IDXP. It's a very important lever. So, particularly for the regional areas because teleradiology allows us to report in any regional area. And IDXT, our teleradiology business is the one of the few businesses in the radiology industry in general that has an ability to easily attract radiologists. So we continue to grow at RDXT. We have about 90 radiologists to date. We have a pipeline of new radiologists coming in to join RDXT all the time. And moving more work to RDXT allows the work to be done more efficiently and at a lower margin. We're also looking forward to the expedited pathway that government or APRA will be producing for radiologists. It is the next cap of the rank after the expedited clinical specialist pathways that have already been implemented for anesthesia and for general practice. And radiology would be next to come with the next camp of the rank and we expect to see to be able to recruit radiologists from places like The UK and Ireland on this expedited pathway quite effectively. Understood. We also on the bulk billing program, David, that the government recently introduced, the trebling of that bulk billing incentive for GPs is very much more material in the regional areas than it is in the cities.

So, we would expect to see more GPs being able to bulk bill more patients in regional areas and drive up the number of patients in the regional areas coming in. And then finally, I suppose, CT lung screening, it's the CTs are a highest margin modality. They're the modality which uses least radiologists and labor resources. So as we move more towards CT through things like lung cancer screening and Smertera, the $264,000,000 over four years, we will see margin improve just because of that modality change.

Understood. If I could just follow-up on that last statement you made, you've noticed you've told us that you had about a 2% cut in CT public reimbursement. I mean, is it possible given the rural setting that and potentially lack of less competition in a metro setting that you could increase price in CT scan and still see volume? Is that a possibility going forward?

We're very selective about increasing price in CT in particular because CT is our highest margin modality. We don't like to put a price on CT and in most places, almost all places, we don't charge any gaps for CT just because it's a high margin modality. And usually, we would charge bigger gaps on the lower margin modalities. So, CTs are also quite elastic and that you can expand the number of CTs you do quite easily. It's not nearly as time intensive as MRI for instance. So, while we were hurt more by the reduction that Medicare put in place in January because of our over index signal on CT. We do think we're nicely positioned for the growth in CT that we will expect and based on overseas experience, the lung cancer screening program has driven significant volume in the CT modality in particular. Because what happens oftentimes is patients who present for lung cancer screening. These patients are high risk patients. A fair number of them, roughly fifteen percent will need additional diagnostic work done and a lot of them need an additional CT to be done six months later. If for instance, a nodule is found, nodules are very prevalent in this population, You would need to monitor that in six months' time, the patient would need to come back and withdraw more CT volume.

Understood. And finally from me and I'll get back in the queue. Does the capital acquisition allow you to grow more in line with Medicare growth rates given that it's more in faster growth metro areas?

We would expect that because capital is over indexed in the metro areas as compared to our overweight the original IDX business being more overweight in the regional areas. So, we certainly would expect that with capital and capital is exposed to metro area that we would get that growth in the metro area as well. Also importantly to point out, capital bulk bill a lot of their patients and the new bulk billing initiative that was announced over the weekend will help the capital practices in particular. As the GPs increase their volumes, we'll see more referrals to the capital clinics and those positioned in the metro areas will do very well.

Your next question comes from Saul Adesan with Barranco. Please go ahead.

Thanks. Good morning, Ian. Good morning, Craig. Can you hear me?

Yes, we can. Thanks, Saul.

Thank you. A couple of questions for me, if I could. Can I just ask on capital's performance for the half? If you could give us any comments as to the underlying performance of that business maybe versus its previous comparative period? I think we can basically backfill for the EBITDA that Caj delivered in 1H25 using that net debt to EBITDA number you gave us. But I was keen to get your sense sort of operationally what you think happened to that business in the first half? It looks like it may have gone backwards a bit at the EBITDA line.

Yes. So I can probably just respond to that. I think just go back to my previous comments, we have included some pro form a numbers for both IDX and Caplon, slides '26, '20 '7, effectively as if the acquisition has occurred on January. So I think if you were to and you'll be able to have a look at obviously capital's first half FY 2024 numbers compared to these numbers. But the revenue growth was a little softer. Still there was revenue growth half on half of a little over 5%, but there was an improvement in EBITDA. And the reason why revenue one of the contributors to slow revenue growth was the fact that there were four clinics that were loss making that were closed. There was also an insurance recovery in the period prior to that, which we normalize all that out. Whilst it didn't show strong growth on the revenue line, there was good growth on the EBITDA line. And capital's margin overall you'll see from the pro form a number sits at around 21.5%, which is obviously above the 18.8% that IDX reported standalone. So probably just linking Ian's previous comments around the shift towards more of a metro balanced business.

I think if we do see stronger revenue growth at a higher margin, then those two combined should contribute towards favorably, I suppose, on a go forward basis.

Thanks for that, Craig. Could I also ask just on transaction costs, can you give us an estimate of what that's likely to be in second half 'twenty five at a pretax level?

Yes. So I think the we've called out the transaction costs, which have effectively been booked in the first half. You can see that on Slide 25 and it's referenced in various other places through the pack. So there's roughly $15,500,000 on a pretax basis that has been booked sorry, $15,500,000 for IDX, little more if you include capital. There would also be transaction costs that were incurred in capital that are adjusted for in capital's opening balance sheet as part of the acquisition. So what you're really seeing here is just the transaction costs on the Ardex stand alone side. So we haven't specifically called out in terms of providing any guidance for the second half. But I think what I would say to you is that we would expect that the transaction and integration costs that we called out in the scheme book, which were around $50,000,000 are still more or less in line with where we expect to end up.

Thank you. And then last question from me, maybe more of a high level question. So we've clearly heard the government's announcement as it relates to expanding bulk billing incentives for GPs and increased funding.

I mean, it seems to be a case that without that 3.5% indexation that came through in one July last year, the margin performance for the standalone IDX business would have been a lot worse and unable to cover that wage cost inflation. As we look forward maybe a question for you, Ian. How comfortable are you that imaging will continue to see a level of indexation that, again, assists you at least growing your revenues in line with costs? I think the big disappointment this half was the lack of margin expansion in the underlying IDX business. So I guess to what extent do you have confidence that you can start to deliver some operating leverage maybe in FY 'twenty six?

I do have confidence that operating leverage will come back into the business driven by our scale, our increased scale, just the increased scale on its own delivers operating leverage because we get buying power, we get efficiencies across the group that come about through scale, which is very helpful even on the recruitment side. In addition to that, as you said, Sol, we do expect indexation to come in this year. Indexation this year is likely it's hard to guess to make it as to where it would be. I mean, last year's indexation for us, you called out 3.5%, but actually came in a little less than 2% when you include the 2% reduction that came in November. So, because we're in the same position as the rest of the medical fraternity, GPs and other specialists with the exception of pathology. We expect indexation would not be too different to what it was last year. Inflation has come down, so indexation would be a little lower, but we'd expect it to probably come in with a two in front of it. But it's just very hard to estimate. The other benefit that we will see next year is the greenfields that we have in place.

So, including the important greenfields, the big ones like the PETCT, we have in Noosa, which is an area that really will generate a lot of PETCT that's a patient demographic that works very well, particularly for things like PET PSMA, which are the high volume, higher margin PET CT part of the work that we do. But the one part I think, Saul, that I think a lot of analysts are underestimating right now in my view is the positive impact through things like the lung cancer screening program and the MRI deregulation, particularly for partially licensed magnets, like the 16 that we have in place. And also the merger synergies, the $10,000,000 at least of merger synergies that have already started coming in and will continue to come in and most of that will be realized within one year of December 24. So, we will expect that also to drive further margin improvement going forward.

Thank you very much. That's all the questions I have.

Your next question comes from Steve Wien with Jarden. Please go ahead.

Thanks, Ian and Craig. Just wanted to drill down a bit on this, pardon me, the wages cost. And I don't I struggle to understand why it continues to grow for the same reasons each period. RDX T is something that you've had for a while now and how come you haven't been able to leverage it already to kind of moderate that wage increase if it is only located in two regional areas?

You're right, Steve. We would have liked to have been able to use IDXT more. And it's been a question of scaling IDXT up. It's a business that started from a standing start in August of twenty twenty during COVID and has grown materially since then. But we've had to put the systems in place ensure that we've got the systems that can scale up well to the point that we now have them all in place and can scale up a lot more quickly as you can see from the number of radiologists we have in our pipeline right now, more than 30 radiologists coming in, more than 80 radiologists, 90 radiologists in IDXT right now reporting for us. It's a business that we finally have got the systems in place that we can scale it up a lot more quickly. But the other thing in the regional areas also that we did call out last time when we presented our revenue results at our AGM was that we do have in those regional areas capped price contracts. And in those capped price contracts, we are in periods where Medicare grows at double digits like Medicare has grown recently, we are capped out in terms of our growth at that high single in high single digits.

So, we don't quite get the full Medicare growth that we would see in those regional areas even though we're doing the work. We only get recognition for that work in the following year. So, there is a delay because the cap price then gets reset a year later. So, October, we had a big reset of our cap prices. But growth in regional areas has happened a lot through those hospital emergency departments and that's where we have our contract. So, in regional areas much more than in metro areas when patients are not well, they present to their local hospital ED, especially when GPs are charging gaps. And we've seen significant growth in those hospital EDs that we service. And our growth there is kept out during the current year even though we do get benefits the next year. Steve, sorry, I might just add to that as well. I think if you think of the combination of in these regionally based reporting contracts that we've got, where we've called out one in particular that was capped until one October last year, What we've seen is strong growth in that as Ian referenced, probably much stronger than we've seen even in prior periods, driven by probably this just affordability, people going to EDs or public hospitals and so on.

And the ability to just turn on the TAP with IDXT with teleradiology. I mean the fact is we are doing more and more through teleradiology, but just there are some absolute constraints you can't turn on the TAP that quickly. So and that's led to the need for locums at this higher cost. So, we'll obviously be looking to address that going forward and with a view to ensuring this cyclical not structural.

Okay. That makes sense. I wonder if you can just quantify the impact on your margin from those capped contracts that you have because clearly that must be one of the biggest impacts to your margin and to sort of and it's been capitalized into your outlook. So, I wonder if you can just put some numbers around it so we can adjust for that as we look forward. And then, the second part of this question is, if volumes are growing so strongly as you suggest already, does it present another risk that you get to that CapEx the revised CapEx again? Or have you got a lot more of a buffer such that you don't have this same scenario emerge a year later?

I might just provide a couple of comments here. Look, I mean, we can't put a number on it and sort of haven't put a number on it. But just to provide some context, I'm sure Ian's got a view as well. But I think this fall, we've probably seen particularly strong growth in the prior year as well as continuing into this half. So, it's true that either we have a cap in one contract, which resets in one October. The other one is effectively a cap, which resets the following years. So, we've seen strong growth in the last probably year or two, but at some point that growth has to taper. I think it's a reasonable assumption to assume that you're not going to continue to see that very high growth continue and therefore the bumping up against the caps where we've then got the obligation to serve at a higher cost. So I would expect that to normalize over time. And that's on sort of the revenue side of things. On the cost side of things, come back to what we were probably talking about before that over time solutions include higher use of IDXT in teleradiology to reduce that cost to serve.

So I would say the issue is more one on the cost side that we've seen in the six months than it is the absolute impact on revenue in the six months.

Just to add to what Craig said and to put some information on there, Steve, is that there are two major cap contracts. One, as Craig said, resets in one October, the other resets in one July. One is in Western Australia, the regional areas in Western Australia, Country Health Services and the other is in Central Queensland.

So, that's one July which year? Every year one July. So we get recognition in the following year for the increase above the cap that happened in the prior year. And it's only in years like the most recent years where the growth in Medicare has been at double digits that we get capped out. We usually don't get capped out because growth is usually even in the high single digits, but it's only when it gets to these double digit kind of growth rates that we get capped out the way we have and we have to wait for the following year to then be recognized because we get the uplift, which recognizes the expenditure that we went through in the prior year, but there is a delay. And the way that the accounting works is that we obviously can't count the additional benefits we get the next year for the services we provided even though we went above the cap which gets us better reimbursement for next year.

Okay. Sorry to labor it, but why won't you disclose the impact of that on the margin? It's clearly distorting the impression that we get to see of what your margins are that you're suggesting are no longer going to be there.

It would be very helpful given that provide any guidance to actually be able to adjust to that.

There is a competitive component to it as well. I mean, I wouldn't want to give information that competitors could then use to bid for those contracts in future years. So, we need to keep that in mind also. But what we could do is, we could discuss internally to see what kind of additional visibility we can give that would not have a competitive impact on us.

Okay, that would be great. Thank you.

Your next question comes from David Lowe and JPMorgan. Please go ahead.

Thanks very much. Can I just continue on with this one? So when you said that there's an issue with competition, I understand that you've got two contracts that presumably mixing them together, obscures that a little more. Are the revenues a public item that we could get an understanding on? Because frankly, unless the revenues are public as well, pretty hard for others to really adjust for this. But it would be useful from our perspective to understand what underlying margins have been or margins ex those two regional areas. Maybe we'll leave that one over to Alex because I think we've probably gone through it a fair bit. Yes. David, just to respond to that, I mean, this is not public information, just like any business that are contract business has. And yes, see What I'm saying, if you gave us a margin on the underlying as we don't know the revenue either, so we would get a better sense. I mean, it's only part of it. And I understand the competition issues, but it seems like Integral for a few years now has been reporting labor cost challenges and more recently in a way that hasn't been reported by others that are nearly the same degree.

So it does seem like there's some unique issues because clearly there are unique issues in the regional areas. But you're almost doing investors a disservice, not giving us a better sense as to what it is. Obviously, we'll all be pleased when we move past this period. I just want to touch on It is more expensive. There's no doubt to service those areas because especially with radiologists on the ground as we do need. So while a lot of the work can be done by IDXT, we still need radiologists on the ground to do the interventional work. And it does cost more to get radiologists to encourage them to move into service those regional areas, in some cases to live in those regional areas so that they can develop the relationships with the local referrers that they need to do. I think the best example you can get if you're looking for numbers would be to look at what hospital EDs have grown by in the regional areas, because those ED growth rates have been very high. And you may be able to get those. I'm not sure I haven't looked because we get access directly obviously because we're doing the work.

But if you were to look in areas in Western Australia and Central Queensland, there may be some of that data available.

I guess, okay, one final question on it before I do change topics. So when the volume runs ahead of that cap, is the reality that you don't get paid for the additional work, but you do have to serve it, service it. So you don't get additional revenues and you then need to pay Locum to do the work. So it's a double impact if you exceed the cap. Is that the right way to understand it?

Yes. We still get paid for the work, but we get paid at a lower rate.

All right. Let's change topic if I could. I noticed in the slide deck and I think Ian you commented on it, we've got the lung cancer screening and we've got MRIs. I noticed the comment that you're expecting increased competition or you're cautious on increased competition if I read that correctly. I was just wondering if you could expand on that please?

I'm not sure where the increased competition comes, but for the MRI particularly, what we're talking about is that the partial licenses get upgraded to full licenses, competitors also get their partial licenses upgraded. But in many places, including places like Imaging Olympic Park, Queen Street Mall in Brisbane, John Flynn Private Hospital in the Southern End Of The Gold Coast, Those are all partial those are all MRI sites where we're going to do very, very well despite regardless of the competition because we've looked at the comparative areas. But I think what you may be referring to is the increased competition in anticipation of the higher growth rates that are coming in. And that's really propelled by MRI deregulation and national lung screening and the high growth we see in Medicare overall. So, there are more players coming into the industry when they look at the prospects of radiology being as strong as they are. So, these are competitive that would be coming in anticipation of higher growth going forward.

All right, great. Thank you very much for those answers. I will get back in the queue.

Your next question comes from Craig Wong Pan, RBC. Please go ahead.

Thank you. Could you just outline your expectations for the margin of standalone IDX business? The sort of slight margin expansion you achieved in the first half, is that sort of indicative of what we should expect in the second half?

Craig, look, I'll comment on that. Look, we obviously haven't provided any guidance in regards to the second half. So I can't do that on this call. But what I would say is that there is an expectation that over time we will if you think about the mergers going ahead, We've got increased scale. We haven't really talked a lot about procurement on the call so far. But one of the major work streams that we've got in train is focused around really in a much more structured way looking at procurement, whether it be on the CapEx side with major suppliers, service agreements on equipment, consumables, facilities maintenance on more of a national level. So these are all the areas that we look at. So I think the expectation, put simply, remains that we expect EBITDA margin expansion over time, notwithstanding the fact that we've had these higher clinical labor costs in a couple of these regional areas in particular where we have sizable reporting contracts that have a high cost to serve. So I think that's probably all I can only say, Craig.

Okay. And then the capital business, the sort of 5% growth impacted by some of the closures of sites. Just wondering for the second half, do those closures of sites still impact the revenues in that period? So should we can we expect kind of further similar growth because you're cycling that period where you've closed sites or have has that washed through now and then the second half should be a more normal industry type growth?

Yes. No, I think you're going to see a continuation of that on the revenue line in the second half. But from an EBITDA perspective, I think we would still expect solid performance at the EBITDA line. This half, if you look at this half compared with half ended thirty one December twenty twenty three, it was EBITDA growth of about 10%. I'd say it's about 10% because in the pro form a numbers, we've had to make a few adjustments from an IDX point of view on capital's results. But so probably we'd expect continuation of the sort of the growth rate that we've seen in the first half at the revenue line, but stronger growth at the mid-twenty one.

Okay. And then last question, just that operating loss of $1,300,000 that capital incurred during the time you had control, Does the standalone IDX business face a similar loss in that period given the kind of slower sort of shutdown period or lower activity period or is that abnormally high for the capital virtually the same. Craig, I mean, this is sort of across the industry. You'd appreciate 20 was right on the cusp of really the Christmas shutdown, the year shutdown. So relatively low revenue, but obviously with high fixed cost in the business.

Okay. Thank you. That's all my questions.

Your next question comes from Leanne Harrison, Bank of America.

If I could just come back to that labor cost. I know we've asked lots of questions on this, but if I could think through what you're currently paying for those locums in those two regional areas. Are you paying more than you would ordinarily pay because they're hard to come by?

Yes, that's true. That's absolutely true, Liam. That's what's driving the higher cost.

Okay. And so if we think about what steps that the government is taking to bring more radiologists into the country, can you wind back that cost you're paying for those on the ground locums over time or when they become available?

Yes, we absolutely can. We've got a shortage of radiologists and particularly in the regional areas. And as we bring in new radiologists at a lower rate, we can service more and more of the work at a lower cost. A lot of these a lot of the highest cost, in fact the highest cost work that we do in the regional areas is flying locums to those regional areas. So when we stop flying the locums because we've got international medical gradients in those areas, we'll see costs come down nicely.

Okay. And then with ability to ramp up IDXT, you did mention that you're trying to increase the bandwidth there, but is the bandwidth for IDXT in the second half sufficient that you could get your locum numbers to the minimum that you require on the ground?

Well, we're trying. We're still going to need locums in the second half, but IDXT has grown a lot and continues to grow and we expect IDXT to pick up more of that work that will reduce our need for locums. But we still do need locums in those regional areas. Maybe not to the same degree in the second half as we will in the first because we do have materially more doctors working in RDX T right now.

Okay. Thank you. And if I could move on to the revenue side of things in light of the federal government increasing GP bulk billing. Have you given thought to I guess your volume elasticity with respect to the gaps that you're currently charging, is there any have you given any thought to maybe rolling back some of those gap charges?

We do look at pricing on a regular basis market by market. There are always opportunities that do present and the bulk billing incentive program that government has put in place does present more opportunities to us. And we will continue to price according to what the market will bear in each area that we service. On the capital side of the business, the previous capital clinics, we do a lot more bulk billing and we expect to continue to do a lot more bulk billing in those practices because we service the GP market in those areas. And as the incentives help the GPs to put to see more patients, those patients come through to us. So, we're able to service more and to service them efficiently through the bulk billing models that capital has.

Okay. But just to confirm, at this stage, your gaps remain where they are and hasn't, I guess, reduced from given the cost of living pressures?

We made no material changes to our guests, but we do make we do change them when the local market dynamics are required. But we've not made any changes like we did a few years ago when we introduced gaps for ultrasound for instance. We've not made major changes to that degree again.

Okay. And just one last question for me is with the change in MRI regulations or the deregulation, with those partial licenses being upgraded to full, how should we think about IDX's relationships with the specialist to ensure that downstream of referrals?

Excellent question Lee and that's been a key focus of ours with regard to the capital clinics that have come on. So, all those capital partial licenses and capital hit 10 in Victoria, mainly metropolitan regions of Victoria. So, regions that are well placed to attract specialist referrals. And we've been working very well with the capital MLO team, that's the medical liaison officer team to upscale them to allow them to access that specialist market. So we've gone out to the specialist market. We're marketing ourselves to specialists on the back of the fact that as from January, we'll be able to service specialists on those MRIs the same way as we're able to serve only GPs and those MRIs right now. So, we'll be able to service both from January. And because this is a strength of IDXs and that we know the specialist market well and we're helping capital who've historically been much more focused on the GP market. We're helping to ensure that they've got the necessary strength in the specialist market to hit the ground running on January. And I'm very confident that from January as the new MRI licenses come on stream, we're going to see material improvements in our revenue and margin profile as they come on.

On. Your next question comes from Matthew Cheuvreux with Citi. Please go ahead.

Just wanted to clarify one thing. I think you've mentioned that you had four cash clinics that were closed because they were loss making. Is that correct?

That is correct, Matthew.

And sorry, why are they closed? And is that a permanent thing?

Yes, I think this is look, I think this is something that capital is part of there. It's an ongoing review of profitability. But I think there were a few in their portfolio that just weren't performing and so they've closed them. That accounts for some of the lower revenue growth but improved profitability because of the elimination of the losses.

They were very small clinics and luck making.

There was also within the prior year, so we'd be talking in the first half FY 2023, there was a fire in one of their clinics and there was an insurance recovery. That recovery was favorable and so probably boosted that prior period revenue on which we didn't have to grow for this half.

Okay, got it. And just on the synergies, so Ian, you were talking about the majority of the $10,000,000 within twelve months. How much of that should we expect to see in the actual P and L in the second half of 'twenty five and then then going into 2026?

Maybe I'll take that one, Matthew. Look, again, we haven't put a specific number out there, but other than we're confident in realizing at least $10,000,000 of synergies on within the first year following acquisition. The majority of those we've called out, probably 80% of those expected synergies are headcount. We haven't put an absolute number out there in terms of the half year. But look, it's significant. A lot of those headcount changes have been enacted, I can say that much. And we've been conservative I think in terms of procurement synergies because we just won't know until we've had some of these negotiations with suppliers bid on capital equipment, service agreements, consumables, facilities management, all these sort of areas.

But in terms of the first half sorry, second half contribution in synergies, I think it will be pretty solid.

Yes, a lot of the On a pro rata basis given that all those headcount changes were made sort of either pre Christmas or shortly thereafter.

Yes, okay. And then just on the lung cancer screening program, you mentioned $260,000,000 over four years. What do you think is your natural market share in that market?

So we would get above our ordinary market share. So if you look at our market share, we're probably in the region of about 12% to 13% right now. But in that market, in the CT lung cancer screening market, we should be well above our weight. So, I would see us being in the region capturing 15% to 20% of this market.

Okay. Thank you. And then maybe just one final one for Craig. Just on CapEx, given the revenue growth that you're seeing that seems to be lagging the market, are you revisiting your growth CapEx plans? And then how should we think about CapEx in 'twenty six relative to 'twenty five? Should we expect kind of growth along with the revenue line? Thank you.

Yes. So Matthew, I think, look, the guidance we provided is obviously for to be clear for the full year. So when we've said $40,000,000 to $45,000,000 for IDX and then $20,000,000 for capital. Just to be clear, that's not $20,000,000 for the second half of capital, that's $20,000,000 for the full FY 2025 year. I think we're at the early stages of planning the FY 2026 budget and looking at what the both the replacement and the growth CapEx needs will be across the group and where the opportunities are. I think fair to say, we'll also be looking to prioritize growth CapEx on a merged basis where there might be some opportunity for some quick wins. I'm not talking individually big amounts, but I think particularly probably on the capital side there are some opportunities there to do some things reasonably quickly that should drive results. So, yes, that's probably what I would say at this stage.

Great. Okay. Thanks very much. Your next question comes from Andrew Paine, CLSA. Please go ahead.

Yes, morning all. Thanks for taking my questions. Just want to come back to your comments on indexation being a little over 2% when you include the CT impacts. Just want to confirm that is since November and not for the full half, just so we can assume that that's the pricing benefit going into the second half twenty twenty five?

Yes, I think, Andrew, just to be clear, and I think we've talked about this before sort of probably the AGM. But the if you look at the net impacts across the whole of FY 2025, so from January to thirty June of the 3.5% indexation and then the 2%, so 3.5% indexation one July including CT and then the 2% cut one November, the blended impact for IDX stand alone is about 2.7%.

Sorry, over the calendar year 25% or that's the view over FY 25%?

Financial year 25%. So the Medicare index stage was 3.5% effective January including CT and then on January, it was 2% cut CT. I'm just saying for IDX stand alone that blended average indexation across all of FY 2025 was 2.7% roughly.

Yes, okay. So that's like consistent with our views. That's a 0.7 headwind to the market, but you say you do more CT. So is that implying that that 2.7 across the market, you're probably a little bit lower than that?

Well, I think, yes, I suppose that's the impact of indexation on IDX. But as Ian called out, the fact is we do more CTs as a percent of our total revenue than the market as mentioned by Medicare.

Yes, okay. That makes sense.

And therefore, that does explain some of the relative difference in our performance and Medicare numbers.

Yes. Got it. And then just trying to marry up your views on the opportunity in lung cancer. You obviously mentioned that that's a factor that's driving increased competition and something you called out when you're talking about the underperformance versus Medicare. But you think you can capture higher share? You just mentioned market shares just before. I just want to understand how that dynamic works with you seeing increased competition in that sector at the moment, but still thinking you can capture higher market share when this screening program comes into effect?

So, we believe we will capture higher market share because we're overweight to CTs. We also have the low dose high speed CTs that work very well with this program. And we have the technology that allows us to automatically populate the fields that the program is looking for, which would save us a few minutes for each scan. So, we think we're really nicely positioned for the lung cancer screening program as it comes in. We're also beautifully positioned for the follow on work that that program will generate. So, the additional CT that needs to come back, the lung biopsy that needs to happen and it can be done by a lot of our trained radiologists in that area and importantly, the pet CT, the additional pet CTs on the lung that will be needed for patients that picked up as being positive. So, the experience overseas shows that a lot of patients, a high proportion of patients have nodules, roughly fifteen percent of those patients need to come back to have those nodules checked within six months or so to see if there's been any growth. Some of those if there has been growth will need to go on for lung biopsy and some of those will need to go on for a PET CT of the lung.

And that's why we're nicely positioned to service that continuum and that additional work is not part of the screening program, but that could fall under the regular Medicare program.

Yes, okay. That makes sense. And sorry, just to come back on to this, obviously the cost have been a focus here, but just trying to understand the phasing of those costs through the half. I know it's related to the contracts and things like that, but it sounded like those contracts had reset through the half. So did you see a normalization of the revenues and the cost in the latter part of the first half and how do we think about that going through the second half?

I think it's fair to say in terms of those contracts that one of them set in January. So we have seen an improvement there. And the other one will set on January this year and that one we've not seen as much increase as we have in prior years.

Yes, okay. I think it's been covered. Thanks.

Your next question comes from Rachel Harwood and Macquarie. Please go ahead.

Hi, Ian and Craig. Thanks for taking my question. Just a quick one on top line. Medicare benefits, I guess, just came out this morning. It looked like a solid month in January, up 10%. Do you have any commentary, I guess, how you're seeing the top line into the second half?

I think Rachel, a couple of things. We haven't called it out specifically, but I think continuation of probably what we saw in the first half direction is what I would say.

Okay. That's great. And apologies if I missed this, but any expectations about your ability to roll out IDX T to cash, like any plans in the near term to do this?

Yes, we have started already. So we have been servicing cash with the cash Victoria business with IDX T since about October of last year. And we will soon be able to service the rest of their business with RDXT as well. But the demand on RDXT are really prioritized now to service those regional areas, even though we are doing a fair amount of work at the previous capital clinics and we're still servicing our external contracts, which have also been growing.

Your next question comes from Dan Hurin, MST Marquis. Please go ahead.

Good morning. Look, I just wanted to ask, you talked about the bulk billing incentives that were announced in the weekend, it's just that there's referral upside. So are you suggesting that there is late GP capacity in the system? And can you see that in the referral patterns within your customer base?

Can you repeat the question, please?

So you're saying that there's a referral upside from the bulk billing, which by cross logically that means there must be latent GP capacity in the system. So can you see that? I mean, if referral patterns changed to your business as the bulk billing rate has fallen over the last couple of years?

So we think that what will happen is that more GPs will extend the hours and work more. If we look at both our business and at our referrers, radiologists over time have worked less, especially since COVID. We've seen less full time radiologists and a lot of them were working part time and we've seen similar a similar trend amongst specialists and also amongst GPs. I think what we'll see is that the demand will draw more GPs out to work more, especially that in addition to the bulk billing incentive, there's also that revenue that cap that increase that they get when their bulk billing volume reaches certain levels. So, we certainly think it will be very helpful for bulk billing levels to approach the 90, which is what was set out as the government's target over the weekend. And we know that we see a fairly consistent proportion of referrals from GPs that come on to radiology. And the reason of 10%, twelve %, if you include both the referrals we get directly and also the referrals we get that the GP sends on to the specialist and then comes into the into radiology.

Okay. Thank you.

I understand that's all the time we have for. I'll now hand back to Doctor. Kadish for closing remarks.

We're obviously disappointed with the market's response to our results and also the outlook. We're very positive about the outlook going forward and I think it's been underestimated the positive impact that the merger synergies are going to be having even right now and into this half and then into next year. And also the positive impact from these material programs like the MRI deregulation program where companies like ours with these 16 partial licenses will benefit from tremendously. And then also the lung cancer screening program where if the overseas experience is anything to go by, it's been very positive for the industry. So, we are obviously disappointed with what we've seen in the market today and over the course of the next two weeks, we're looking forward to engaging with more of our investors and maybe explaining a little more of where we see the value and the benefits to ourselves to the industry, but then more importantly to ourselves and the way we're positioned within the industry as these very positive changes occur over the next while. So, there are three really positive things. One is the merger synergies at least $10,000,000 most of which is going to be realized within the first year already being realized right now.

And the other two with regard to the MRI deregulation, which we're well prepared for and is starting on January this year, and then also the lung cancer screening program. So, I think that those have been underestimated given the reaction that we've seen in the market to the temporary blip we see in regional in our cost and our labor cost to service the regional areas. But thank you all very much for your participation and look forward to engaging over the next few weeks.

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