Release Date: February 26, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Integral Diagnostics Ltd (ASX:IDX) reported solid revenue growth of 7.8% and operating EBITDA growth of 8.2% for the first half of FY25.
• The company successfully completed its merger with Capital Health, which is expected to deliver at least $10 million in synergies, with most benefits realized in the first year.
• IDX has demonstrated strong patient satisfaction, with net promoter scores of 83 in Australia and 79 in New Zealand.
• The company is well-positioned to benefit from regulatory changes, including MRI deregulation and the national lung cancer screening program, which are expected to drive future growth.
• IDX has increased its free cash flow by 22.7% and improved its operating diluted earnings per share by 14.2%.

Negative Points

• IDX faced challenges with clinical staff shortages and labor cost inflation, particularly in regional areas, impacting margins.
• The company was adversely affected by a 2% reduction in Medicare reimbursement for CT services, as it is overindexed in CT revenue.
• IDX's operating margin was constrained by higher clinical labor costs, despite efforts to contain non-clinical labor expenses.
• The company experienced a $1 million operating impact loss from Capital Health during the Christmas-New Year period due to high fixed costs and low revenue.
• IDX's growth in Australia was below Medicare growth rates, partly due to capped contracts in regional areas that limited revenue recognition.

Q & A Highlights

• Warning! GuruFocus has detected 7 Warning Signs with ASX:IDX.

Q: How can Integral Diagnostics control clinical staff costs going forward? A: Dr. Ian Kadish, CEO, explained that the company plans to leverage its teleradiology business, IDXT, to manage costs, especially in regional areas. IDXT allows for efficient reporting and has a pipeline of radiologists joining. Additionally, the government is expected to introduce an expedited pathway for recruiting radiologists from countries like the UK and Ireland, which will help alleviate staff shortages and costs.

Q: Is there potential to increase CT scan prices despite the 2% cut in public reimbursement? A: Dr. Ian Kadish noted that the company is selective about increasing CT prices as it is their highest margin modality. They typically do not charge gaps for CTs to maintain volume and competitiveness. The company is well-positioned for growth in CT volumes, particularly with the upcoming lung cancer screening program.

Q: How does the capital acquisition impact growth in line with Medicare growth rates? A: Dr. Ian Kadish stated that the acquisition of Capital Health, which is more focused on metro areas, is expected to align growth more closely with Medicare growth rates. The new bulk billing initiative will also benefit Capital's metro clinics as GP volumes increase.

Q: Can you comment on Capital's performance for the half-year? A: Craig White, CFO, mentioned that Capital Health showed revenue growth of over 5%, despite closing four loss-making clinics. The closures improved profitability, and Capital's margin was higher than IDX's standalone margin. The company expects continued solid performance at the EBITDA line.

Q: What are the expected transaction costs for the second half of FY25? A: Craig White indicated that transaction and integration costs are expected to align with the $50 million outlined in the scheme booklet. Most headcount changes have been enacted, and procurement synergies are being pursued.

Q: How does the company plan to address the ongoing labor cost challenges? A: Dr. Ian Kadish emphasized the use of IDXT to manage costs and the expectation of recruiting more radiologists through expedited pathways. The company is also focusing on reducing locum usage by increasing IDXT's capacity.

Q: What is the impact of capped contracts on margins, and is there a risk of reaching the cap again? A: Craig White explained that capped contracts in regional areas have impacted margins, but growth is expected to normalize. The company is addressing cost issues through increased use of IDXT and expects the situation to improve over time.

Q: How will the MRI deregulation and lung cancer screening program impact IDX? A: Dr. Ian Kadish highlighted that the MRI deregulation will upgrade partial licenses to full, benefiting IDX significantly. The lung cancer screening program is expected to drive CT volumes, with IDX positioned to capture a higher market share due to its technology and service capabilities.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.