Colin Goldschmidt, Sonic Healthcare Limited - CEO
...the result also includes non-recurring costs of around AUD14 million and you'll see that the AUD731 million EBITDA is before NRIs. It comes back to AUD717 million if you include the NRIs. Those NRIs are predominantly related to CBL restructure costs, the costs of exiting two contracts in New Zealand and also some acquisition costs as well.
A little bit of information about the dividend, as I mentioned for the full year it's up 4.5%. The final dividend is up by AUD0.01 to AUD0.41 and that's a 2.5% increase. Franked to 55% as previously and the record and payment dates are there for your information. We are announcing today that our dividend reinvestment plan will operate for the final dividend, and a little bit more about the DRP. A 1.5% discount will apply and there will be a 20 day pricing period, the dates are given. These applications will be due by September 14.
We have also entered into an agreement with CBA Equities for a shortfall placement process whereby CBA will subscribe for up to 100% of the shortfall in the DRP. I need to just say that this is a fairly unique process but it simply means that we don't guarantee that the shortfall will be filled entirely and that decision will be made between Sonic and CBA on a day by day basis depending on market conditions. I should also say that if it is 100% filled it has an impact of around 1% dilution on EPS.
So the DRP and the DRP shortfall placement process are really to fine tune our capital structure following the acquisitions we made right at the start of FY16 but which were completed in late FY14 or leading into late FY15. In particular the Medisupport acquisition which is a fairly large acquisition. So these two measures will reset our balance sheet for future growth.
Moving onto our guidance for FY16 and some of this information has already been provided. We have given guidance in July of EBITDA between AUD850 and AUD875 million at current exchange rates and that translates to AUD815 to AUD840 million at constant currency rates. So those are -- everyone knows what the constant currency is. This represents about -- the top non-constant currency numbers represent about a 20% increase in revenue at current exchange rates and at constant currency rates it represents about 15%. The range is something like 13% to 17% revenue growth and it excludes acquisitions, new acquisitions as usual.
Interest expense is likely to rise by between 5% and 10% largely due to acquisitions made in FY15 and the current base rates will remain the same. Tax rate is expected to be 25% as usual.
Looking at the next slide is the pie chart we provide showing total revenue as reported by country. There are some interesting things evolving in Sonic's mix of revenue and I think the one thing you can see on this particular pie chart, and they'll be more, is the slow increase even in FY15 in the UK business, now up to 6% of our total revenue.
The next slide, the bar chart, is an interesting slide and it's there really to show a couple of things. First of all I should just say that these numbers are based on current spot rates and if you look at the history of our revenue, the blue bars are our Australian revenue and we go back to 1995. It's a very steady -- if you put a trend line in, there's very steady growth over the 21 or 22 odd years of this chart. Then the red bars are showing our international revenue starting in 2000 when we entered New Zealand with the SGS acquisition, that's over there and then again we go to 2002 where we entered the UK business. 2004 was Germany, 2005 the USA and then a dramatic expansion of our business offshore and in particular in Europe.
If you then go to 2016 where we have put in estimated revenues based on spot rates you'll see a dramatic increase in our international business and in fact the mix -- the international revenue's approaching AUD3 billion. Australian revenue is now over AUD2 billion. So total revenues are getting closer to the AUD5 billion mark but the mix between international and Australian is approaching 60% to 40%. It's not quite that but getting up there.
So I guess -- and another point I should make is that obviously the international revenue is very much affected by foreign currency numbers and in fact that flatness in the 2009, 2010, 2011 and 2012 was when Aussie was stronger and obviously now as the Aussie has weakened we're getting a boost up in international revenue as well but nevertheless these are the actual numbers. Except for 2016 which is an estimate.
I think we can expect this trend to continue. So whilst Sonic Healthcare certainly is an Australian company and started off in Australia, we've always predicted that our big growth is going to come from outside of Australia and we're focusing very much on growth in Europe and in America.
Turning to Australian Pathology, we had fairly healthy revenue growth for the year. The 5% that we've given does include the acquisition of the SAN hospital, pathology business which accounts for about 50 basis points of that 5%. So it's about 4.5% organic. We're experiencing strong growth in the specialist and esoteric end of the market however our revenues were impacted by the fee cut that I mentioned earlier. That fee cut was a little unusual in that it affected largely vitamin D and vitamin B12 and folate but the changes had descriptors in them which had an impact on volumes which were somewhat delayed. So I guess our -- what we've said beyond that fee cut is that our revenues grew stronger than the Medicare market which we're very pleased about.
The earnings were negative in FY15 and largely a function of those fee cuts and also the fairly substantial specimen collection infrastructure cost, that's rent and labour in collection centres. Looking ahead we're doing a lot of work in our Australian pathology division to I guess overcome a very trying FY15 if I can put it that way. We've got a range of cost and efficiency initiatives in train. Such as IT, more centralization of testing, doing more data entry in collection centres and a bunch of other initiatives that are already in train.
We will experience some earnings contribution from the SAN acquisition in FY16 which were not in the FY15 numbers and of course we will cycle through the Medicare fee cuts in November of this year. We see strong ongoing growth at the hospital, specialist and esoteric end of the market which is a good thing for the business going forward.
Excuse me, and as part of this we are putting a lot of effort into our genetics division in Australia under the leadership of Professor Graeme Suthers. Our genetics offering is dramatically expanded already within Australia and as part of a global initiative Sonic Genetics, the Australian genetics offering, links into a much broader plan whereby we can offer a large range of genetic tests here in Australia and those will continue to increase. But we have, for example, an outstanding genetics operation in Germany at Bioscientia and one in London as well. The lab in Bioscientia is arguably the best genetics lab in the whole of Europe which links into our Australian genetics offering and in the rest of the world so that we can inter refer tests from country to country and offer an incredibly broad range of tests in a seamless fashion. So that if a doctor orders a test, let's say in Launceston in Tasmania, it might actually be done in Ingelheim, Germany and whilst we will state that the report will come back to that doctor in Launceston in a seamless way through our business in Tasmania.
So we're spending a lot of time on genetics. It is a burgeoning field in pathology and one that we have great capability and one which I hold out a lot of positive thoughts about. I think you'll hear much more about our genetics offering as we go forward.
Moving onto the USA, the revenue for the year sat at 2% growth. The market as you probably know has been fairly subdued over the last few years but the good news is that growth appears to be returning into the US lab market and you can get an idea of that by just looking at our halves, 1% in the first half and 3% in the second half. It looks like that growth momentum is continuing.
As far as the earnings go for the year, our earnings like Australian Pathology were negative for FY15 but almost exclusively due to CBLPath where we certainly had a bunch of issues which I won't go into again in today's presentation but the very good news is that through FY15 and particularly in the second half we have spent a lot of effort and expertise, almost on a global basis, to totally restructure this business in a very sophisticated way if I could put it that way. The turnaround is quite stunning. It is more than AUD10 million without losing significant revenue or damaging the business and so we are very optimistic about CBLPath going forward and in fact this is going to be one of the major factors driving a major turnaround of our US business.
So when we look at FY16 there are a range of initiatives already in place such as procurement tenders and billing initiatives to drive revenue and improve cash collections. We are insourcing and centralizing more and more tests in the US into our set up central lab, Sonic Reference Lab which is based in Austin which we have set up ourselves internally.
Many of our competitors bought esoteric labs in the past, we've done this ourselves. I mentioned the CBLPath turnaround for FY16 because it's very, very significant. We have a renewed focus going on cost control and efficiency gains in our US business and I guess a very important factor underlying all this is the whole market lifting up in growth rates. It's very difficult to operate a lab business when market growth is flat. We had this once in Australia some years ago and we've had this in the US now for a number of years.
So I think of all the things on this list I would say the CBLPath turnaround and the lift in overall market growth rates are the two most significant which will foreshadow a very strong turn around in our performance in the US. foreshadow a very strong turnaround in our performance in the US. So our forecasts show very strong earnings growth in our US division in FY16.
Moving on to Germany, revenue growth was 11%. That was bolstered by a number of acquisitions. The organic growth rate is 6%, which is extremely healthy, well above market growth rates. We continue to take market share from competitors at all levels of business, routine, esoteric, hospital. We are very busy in Germany investing in new technologies, in IT and in new tests.
The Labco acquisition, which is now well over a year completed, is now fully integrated, and really that was almost a model acquisition and integration, very much in Sonic's sweet spot, that's the business that is now yielding fruits for us and will do going forward. There were also a number of small bolt-on acquisitions, all of which are now completed.
As far as the regulatory environment in Germany goes the EBM fee quota, which we've spoken about before, is set to remain unchanged until the end of the calendar year. We don't expect any major changes to the quota but we'll update the market should that be necessary in the next calendar year.
As far as overall operations go in the US, it is a delight to know that Sonic Healthcare, our name and our labs that link to the Sonic Healthcare Germany name, are now labs held in the highest esteem in the lab market. We have a very stable management team in our head office and in all our operating entities. I have to say that the leadership has been strong but also the culture is deeply embedded into our German operations, which is a great thing in terms of strength of business. Our head office in Berlin, under Evangelos's leadership, has now been extended in terms of responsibility to include our businesses in Belgium and Switzerland.
Another very good news story is our business in the UK, where the revenue growth was 25% for the year. That's without acquisitions but including one quarter of our JV with UCLH and the Royal Free Hospital.
In addition to that JV, our private market business -- that's the Harley Street market and other private businesses -- is growing extremely strongly and we expect the revenue growth to keep up that momentum to FY16. So the 40% expected will include three-quarters now of the JV, and the UK business is now becoming a very substantial division within Sonic Healthcare.
So just some summary revision on the JV, it commenced April 1 of this year. It now includes the first customer, as it's called. That's a new hospital or a new trust. The North Middlesex University Hospital is now in where we are processing the work as well. All the staff from UCLH and Royal Free, the lab staff, have been transitioned seamlessly into the joint venture company.
We are planning to relocate into a state-of-the-art building and that will happen in the second half of next calendar year, and that's going to be a fantastic event for us, because as far as the UK goes this, I think, will possibly be one of the finest labs in the country, if not the finest lab. It will have all Sonic's intellectual property go into it and state-of-the-art equipment, as expected. As we go forward, we're certainly targeting more NHS outsourcing opportunities, including bringing in more customers into this particular joint venture.
Moving on to Belgium, the revenue growth has now returned, it was flat in the preceding period because we've now cycled through a fee cut from November 2013. We made a small acquisition, previously announced. It closed on July 3 and the regulatory outlook is now fairly stable in Belgium.
Just to show you a map of our Belgium operations to get an idea, first of all that we operate only in the northern half of Belgium -- that's Flanders. That's the Flemish speaking part and not the French speaking part in the south, Wallonia.
You'll see that we have a number of labs in Flanders. Our head office is in Antwerp and that's where our largest lab is. Then we have a bunch of smaller labs scattered throughout Flanders. This is very much an operation in the hub and spoke model, where we do only essential routine testing in the small labs, with a lot of centralisation into our big lab in Antwerp, which is a very highly automated lab. Some of you, if you get a chance to visit it, it's got a fabulous total lab automation track in it, but a very efficient lab as well.
The lab that we've just bought, the KLD lab, is here in a small town called Ardooie, and there is a lot of integration work to follow between these three labs, the one in Bruges and the one in Mouscron. So those three labs are going to integrate, maybe not fully into one but almost fully into one so there'll be a lot of synergy that comes out of that going forward.
Switzerland, very good revenue growth, 5%. Very strong earnings and margin growth as well. Stable regulatory environment and the big news is Switzerland, as everyone knows because we announced it, is the acquisition of the Medisupport Group which closed on July 2.
That acquisition has moved Sonic into the clear number one position and it's unlikely that we will lose that position for the future, because when you look at the competitors it just seems quite unlikely. So good news, not as bragging rights, but it does give us infrastructure on the ground to grow with going forward. It gives us momentum. It gives us stature in a very important country for us going forward. It also gives us the opportunity to make further acquisitions into the future.
Again, I want to share a map with you on the Medisupport acquisition. This business is a very impressive business. It covers both the French speaking region of Switzerland -- that's in the light blue and the predominantly German speaking region of Switzerland. This bit of the map, dark blue in the south, is Italian or -- Italian speaking and we're not in that area at all.
So there are labs in 10 cities and all these labs have a very good mix of routine and esoteric testing. Again, there's very much a hub and spoke arrangement. The biggest lab is in Geneva and we do have in this business outstanding genetics capabilities as well to add to our expertise in Germany and London, which is very good news because the genetics lab in Medisupport will join Sonic Genetics, which is now becoming a very integrated offering, as I've outlined.
Very importantly, the Medisupport business is culturally very closely aligned with Sonic Healthcare. So they operate a medical leadership model like we do. They operate a federated model, as you would in Switzerland. So those of you who know Switzerland, that's the way the country operates and very importantly, this business has an outstanding team of managers and pathologists who are very involved in the day-to-day management.
Just a revision of the summary -- of the transaction details, CHF160 million in annual revenues. It's about AUD225 million. The deal is initially EPS accretive and will increase further as we extract synergies and it is ROIC accretive in our first year, FY16.
We've provided a pie chart this year of indicative laboratory revenue for FY16. There are a number of interesting points that come out of this. First of all, just that this total pie has increased dramatically if not only from FY15 to FY16. So yes, there are acquisitions in this. For example, the Medisupport acquisition and the Belgium one that I've just mentioned. But you've got to couple that with pretty strong organic growth throughout all our divisions.
Again, I think we're in an industry where we always talk about the ageing of the population. Well it is coming through in our business loud and clear, so the demand for lab testing and for preventative medicine as the population ages and gets into our sweet spot which is 60 years and above, so our volumes increase at organic level. So you've got a pie that is substantially larger based on acquisitions just completed and strong organic growth.
A key thing to see over here is the UK segment, which is now sitting at 9% of the total lab revenue, and Switzerland sitting at 8% of total lab revenue. Also, just to point out that Australia is now down to, if I might put it that way, 30% of our total lab business worldwide. I expect that percentage to keep diminishing, not because our Australian business will diminish but that we're going to be growing faster in the other segments of the pie, largely through acquisitions. So we will -- we have opportunities for acquisition in all countries and much less opportunity for acquisition in Australia.
I just need to remind everyone that this chart assumes current FX rates. It's indicative only and its lab only, so it excludes imaging and our clinical services revenue.
Moving on to the next slide, which first of all Sonic Imaging, our imaging revenue was up 3% and the margin up by 10 basis points. When you look at the numbers in the full year you're going to see that our total revenues and margins were impacted by the sale of our last remaining radiology business in New Zealand.
So if you correct for that you're going to get 3% of growth in our Australian business and margins up 10%. So the imaging division is actually performing pretty strongly. We're very pleased with the way it's going. Great radiologists, great managers, solid business.
Sonic Clinical Services is a name that you may not have heard before, and just before we go into any detail, we've just done a slight internal restructure whereby what we used to call IPN we are now calling Sonic Clinical Services, as an umbrella sitting over all of Sonic's clinical businesses, including IPN Medical Centres. So IPN Medical Centres, it's our occupational health business, it's our after hours medical service, it's our skin cancer clinic business and one or two others, which were all in IPN before but this is a way of actually making it more logical.
So the revenue growth in the entire business was 4% but the medical centre growth, which is now called IPN Medical Centres, was even stronger at 6%. So the medical centre business is performing extremely strongly. It is well and truly the largest medical centre business in Australia, and offers unmatched infrastructure across the country, and great opportunity for us to grow and to find synergies with our other businesses as well going forward. The occupational health business was slightly impacted by the decline in the resources sector.
So the next slide has the debt metrics for your information. It's got the headroom there of AUD630 million, and just to stress that this is before the acquisition of Medisupport and KLD. The Medisupport acquisition was funded largely via a new debt facility. There was a small equity component in that acquisition as well.
The final slide, just looking ahead, after a challenging year for the Company in FY15 we're moving ahead into a much, much brighter position in FY16, where we're looking at revenue and earnings growth in the order of about 20%. We're expecting strong organic growth in all our key markets. All our businesses are actually performing pretty strongly. We're obviously targeting further acquisitions and contract opportunities and we do expect FX tailwind through the year.
The Company overall is in a strong position. We're now in number one market position in four countries, Australia, Germany, UK and Switzerland. That Medisupport acquisition that we've spoken about was very significant for us, not only in terms of its size but in terms of what it offers Sonic not just in Switzerland but in Europe as well.
I guess the big news for us, when you compare FY15 to FY16, is a bit turnaround in our US business. The dividend growth we've spoken about and, I have to end by saying that right around the Company our medical leadership culture is the single unifying force that keeps this Company strong and healthy going forward. On that basis, I'm very confident about how we will perform not just in FY16 but well beyond that.
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Questions and Answers
Andrew Goodsall, UBS - Analyst
Thanks very much. Andrew Goodsall from UBS. Perhaps if I could just ask around that headroom that you indicated. I know that's June 15 but do you have a sense of where that will be post the acquisitions and post the DRP?
Paul Alexander, Sonic Healthcare Limited - Deputy CFO
So there'll be several hundred million, basically. There is no shortage of debt finance available to Sonic. All banks are keen to lend in the current market, so there's some hundred million there, well placed for any further acquisition opportunities as they arise.
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Andrew Goodsall, UBS - Analyst
I'll just add -- that was my next question. Just what's left out there, what areas are you looking at in what regions?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Well, as I mentioned, we're still focusing on the countries in which we currently operate. There are opportunities in all those countries, so we're talking Germany, Switzerland, Belgium. UK will be more contract than acquisition and certainly must not leave out the US as well. So we're looking at acquisition opportunities in all those countries.
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Andrew Goodsall, UBS
Just a final one from me, just I guess a regulatory update around Australia as to what the collection centres rollout -- it's going quite aggressively. Just any thoughts around the MBS review and then just in Europe, whether in Switzerland you might be thinking about what their payment system looks like, or what their payment outlook is.
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Okay. So you ask about Australia first. The MBS review, we are participating actively in that MBS review. We certainly do not expect any major changes to pathology fee structures coming out of that MBS review. I don't think there's any intention coming out of government to look in that direction.
So there might be some fine tuning of some of the item numbers to better reflect the work involved and the complexity of each of these tests. But I don't think you -- I don't think there'll be anything negative coming out of that at all. There could in fact be some positives coming out of that.
Just so that we don't focus only on pathology, that MBS review covers all aspects of health care in Australia. In terms of primary care, there could well be upside for us in the sense that more focus is going to be placed on chronic disease and chronic disease management, which is really a massive problem, not just in Australia but right around the world. So that I think incentives are going to be put in place to focus in on chronic disease management, which our IPN Medical Centre business is extraordinarily well set up to handle.
We've not only got the infrastructure but we've got the technology and IT capacity as well. So we're looking forward to something positive that could well come out of the primary care MBS review site.
Moving on to collection centres, which you asked about as well, we understand that the industry association, Pathology Australia, and the Royal College of Pathologists of Australasia are in discussion with government in an attempt to find some kind of remediation to the rental issue. As we understand it, the Minister is currently considering the problem. Then moving on to the Swiss system, I'm not quite sure what your question there was, Andrew. It was about...
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Andrew Goodsall, UBS
Just whether you see any regulatory concerns on the horizon there.
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So we don't see anything on the horizon in Switzerland at all. Fairly stable.
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Steve Wheen, JP Morgan
Yeah, good morning, Steve Wheen, JP Morgan. Just looking at your guidance for FY16, it looks like there's a tailwind benefit of about AUD35 million, and conversely in FY15 there was about AUD7 million. What's driving that big uplift? I mean, is there an underlying change in the profitability of one of your segments? Say for example one explanation I might have is that the US business might be going a lot more positive? Is that part of the guidance?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Yes. That's a quick answer, okay?
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Steve Wheen, JP Morgan]
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Yes. Then with regards to the -- just the EBM, again on the regulatory side, the EBM time frame to the end of this calendar year, is that an extension on the existing floor and...
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Yes.
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Steve Wheen, JP Morgan
Is there any transparency as to why they extended it and what happens next?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Well as you know this gets reconsidered at -- periodically, roughly every six months, something like that. So this is the next one until the end of the year.
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Steve Wheen, JP Morgan
Okay. Then just lastly from me can you talk to -- clearly Germany is the segment that's growing the fastest. Can you give us any colour as to what's happening with margins there? There's been a strong effort by yourself to focus on improving the cost-out program there. If you could give us something to--
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So as you know, we don't give actual numbers for each of our countries in terms of earnings and margins, but the margins are strong in Germany, and because of all the initiatives in place. In terms of M&A integrations, procurement, physical mergers -- there's a huge amount going on -- you can imagine the profitability is lifting and margins are lifting.
So the business is in a very strong position. But just in general, where your question's heading, when you look at FY16, that strong tailwind in earnings is going to be real. It's not just the US which is a tremendous turnaround. We're talking about a big lift in earnings in the US. But also we've got acquisitions included in this which give us earnings growth as well. Very strong growth in the UK in terms of earnings as well as revenue. The rest of our business is doing pretty well. So you've got a situation where, as I say, coming off a trying FY15, big tailwind, FY16 that's bottom line. Matt.
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Matthew Prior, Evans and Partners
Thanks Colin. Matthew Prior from Evans and Partners. Colin, just in terms of the second half of FY15 and the slowdown in Medicare data we saw in Australia, can we just get some commentary in terms of what you're assuming in FY16 with Australia in terms of growth rate, and just also confirm what you assume around collection centres?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
I'll certainly answer the first half of that. It's a little difficult to reconcile our growth rates with the Medicare numbers. Bear in mind, though, that our revenue is not purely Medicare revenue. You've got to back out the SAN which is in that. That's -- we mentioned, 50 basis points on the total. But we have won a number of contracts.
We always have with non-Medicare revenue, that's occupational health revenue, and various other contracts as well. So there's that issue. There's also the issue that we don't know exactly how all players in the market are performing. So for example there's been, historically, involvement by public hospital labs. Don't know exactly how they're going, and it is possible that Sonic and its large competitor are both taking market off some of those.
It's just there's a bit of a mismatch when you look at Sonic's numbers, Primary's numbers, and the Medicare numbers. I know you guys like following the Medicare numbers. I've warned you not to. But if you follow them, there's a mismatch, and it's most evident this year. So I don't have the full answer to your question. We talk about it, and the answer -- just some of the reasons I've given you are probably in play.
In terms of the collection centres, we are assuming status quo, ongoing, that that's all we can do. Obviously if there's a change then there will be a change to our numbers. But I guess that's not going to be a sudden effect. It will be over a couple of years probably.
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Matthew Prior, Evans and Partners
Great, thank you, and just a hybrid question for yourself and Evangelos here and in Sydney. But in terms of cross-border testing in Europe, and given the push into genetics, how do you see that evolving for the business, and can I just ask Evangelos as to what he thinks industry growth rate is in general?
Evangelos Kotsopoulos, Sonic Healthcare Germany
So on the second question, Matt, we think the market grows above 3.5%, bit more, bit less. It's even harder to see than the Medicare set. On the first question, yes. We do have some cross-border traffic within Sonic, so both from the UK and Switzerland into Germany for esoteric testing and genetics. We've just won some clinical trials, between three of our countries. But it's not going to leapfrog and jump like crazy. The regulatory systems, political systems, reimbursement systems are so vastly different between the European countries. So we don't see that merging together in terms of --
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Matthew Prior, Evans and Partners
Sorry. You see no change there in terms of the mix of your business skewing towards more esoteric type testing which sits outside of some of the cross-border testing rules and regulations?
Evangelos Kotsopoulos, Sonic Healthcare Germany - CEO
Some of the growth we have in genetic and highly esoteric testing comes from international referrals we also receive from countries where we do not have infrastructure. Middle East, eastern Europe, southern Europe, Africa. Next generation sequencing in particular. So that is part of our average fee growth, very high value, high margin testing. But it's still at a relatively small proportion of the overall business.
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Matthew Prior, Evans and Partners
Great, thank you.
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Saul Hadassin, Credit Suisse
Thanks, Saul Hadassin from Credit Suisse. Colin, just going back to Australian pathology. I wonder if you can talk to -- have you had any ability to change your pricing structure for tests where you do in fact charge a co-pay or an out of pocket? Is there any positive mix effect going on from that?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
The answer is minimal. So obviously that's something we would like to do, and we are able to do that most commonly with tests that are not in the Medicare schedule. So there are quite a large number and an increasing number that are not covered by the Australian Medicare schedule book, and those tests which are usually highly esoteric tests, we charge a private fee. There we are price makers, subject to market competition. The best example of that is in the area of non-invasive prenatal testing, where a test is now available to determine foetal abnormalities from maternal blood. So you're looking at foetal cells in maternal blood.
That test is a very high volume test right round the world, the developed world. It's not covered by Medicare at the moment, and we charge a private fee. It's interesting with that particular test, because it's a very significant one in our volumes, and you know, going back to Matt's question about how Sonic's revenue relates to Medicare revenue. There's an example of a test that has increased fairly dramatically, right round the world. But not covered by Medicare, therefore boosting our revenue growth, but not reflected in the Medicare numbers. So that test is actually offered globally, and in Sonic, we negotiate globally. We're dealing with this particular test on a global basis.
Interestingly enough, the lab that we've just bought in Switzerland offers the test in-house. It's a complex test, and not many labs in the world offer that test in-house. They've developed their own test in-house called Prendia, and we will be focusing in on that, so that instead of having to send specimens to California or elsewhere, we'll be able to refer tests into Switzerland should we so choose. We're also going to be bringing the test in-house elsewhere as well, because this is such a common test. So it's in that area that we are able to charge private fees. As far as the Medicare schedule covered tests, it's very difficult on the basis of competition.
It will be interesting to see how this plays out in the years ahead, because it is an option for us, it's a lever for us, and it's a switch that we can progressively turn on, particularly in a company like Sonic where we have high-end expertise, and very specialised pathologists, for example. So I give you the example of highly complex histopathology where the Medicare fee does not match the time, effort, complexity of the test involved. I believe that if we did charge a private fee or co-payment, not only would the surgeons or other clinicians be happy with it, the patients would be prepared to pay.
So an example is if you're getting a radical prostatectomy done, and you're getting an expert urological pathologist to report this -- it's a very very complicated high-end report that we deliver that is vital to the management of the patient. The fee that Medicare charges is just not enough. So if we placed the co-payment on that. I think almost any patient would pay, given that they're paying a gap to their surgeon anyway.
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Saul Hadassin, Credit Suisse
Thank you. Just one last one, maybe for Evangelos. Just on Germany, and based on your current market position in terms of your concentration, just wondering if that would now prohibit you from some form of say medium to larger type acquisition? Thanks.
Evangelos Kotsopoulos, Sonic Healthcare Germany - CEO
Well as you know, Matt, there's about five very large groups in Germany, and they all combine to have less than half of the market. So there's still some way to go on consolidation, and the other half is distributed between dozens and dozens of labs, some of them in their almost EUR100 million range, but many many of them like before we have just acquired and fully integrated. Just a couple of million Euros in revenues. Two or three pathologists, one site. So with many of those, and many of the mid-sized ones, I think we have a long way to go in acquiring and integrating. If it was one of the very large platforms we'd have to look at regions, because national market share doesn't count for anti-trust.
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Craig Collie, Macquarie Group
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Hi Colin, Craig Collie from Macquarie. So just back to collection centres, I mean, this result was pretty strong on revenue, and I think EBITDA was a little bit weak because of margins. I think one of the key drivers there was escalating collection centre costs. If you look at the data, you guys appear to be rolling those out pretty quickly. So from the outside it appears that some of this pain is perhaps self-inflicted. Is that a fair assumption, Colin, or is there something else going on?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
No, it's not a fair assumption. I think when you're in the market, the collection centres that we've opened are almost entirely defensive. In other words, if a competitor approaches one of our existing medical centres and offers a collection centre, we are forced to match it. It's not self-inflicted. Fear not, this is a pain that we would not inflict upon ourselves. This is just the way that the market has gone in with this quirk of legislation.
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Craig Collie, Macquarie Group
Okay, and then on domestic volumes, a bit of commentary that things have slowed down in the last six months. Do you think that's just Vitamin D related, or do you think there's something else going on?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
I think the Vitamin D volumes have fallen. That would be a significant factor in the Medicare numbers. We're not sensing a slowdown in our lab businesses. So I think it would be quite selective. As I say, I can't really explain the low Medicare numbers. We're just not experiencing the same low volumes.
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Craig Collie, Macquarie Group
Lastly, just back to acquisitions, any commentary on where price is attracting, particularly in Europe?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Well I mean the problem with some of the businesses in Europe is that they're owned by private equity and being swapped between private equity funds, and the multiples they pay are significantly higher than what would make sense for Sonic. So in those instances, we're probably not going to be competing for those businesses. I don't think it's all that significant, because if you look at Medisupport as a good example, there was a company that could have sold to private equity, but chose not to. The multiple that we bought the business on was fair. It wasn't quite at the outrageous multiples that some deals have been done at. This was a business whose founders and leaders said, we want to be part of a Sonic Healthcare on cultural grounds, which then means that that's a business we want.
So when there's a business that's going to be bought purely on financial metrics, that won't be as good an acquisition as a Medisupport. Now there are still many other businesses in the world, and in the countries where we operate who want to perpetuate their culture, and who believe in the Sonic culture of medical leadership. So I think there's going to be a lot of opportunities for us going forward.
So if you look at Germany, for example, even though several of the large businesses are private equity owned, there are still others that will come up in the future. Other large ones, and medium-sized ones, and small ones who will want to join Sonic, and whom we will welcome. I think the pricing there will be reasonable. So we are very disciplined with our pricing. We look at a range of metrics. We don't just look at the EPS and ROIC, we look at a whole bunch of metrics. I think it's a good thing that we keep that discipline going forward. David.
-----------------------------------------------------------------------------David Stanton, CLSA
Thanks very much. Dave Stanton from CLSA. Perhaps a question for Chris, seeing as he's being left out. You expect FX tailwind in FY16. Can you give us an idea about the scale at spot of a -- at the EBITDA level of that kind of tailwind for FY16?
Christopher Wilks, Sonic Healthcare - CFO
Yeah, you can probably work it out in the guidance based on what the spot is. Obviously, we don't know what the rates are going to be during the course of the year. But I think you can work that out with the spot on the day we announced the numbers. They're obviously -- it's complicated by the fact that we've got a bunch of characters, and we're moving in different directions. But not really in a position to give you information we've already provided.
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David Stanton, CLSA
Thank you, and perhaps if we could get some colour around potential guidance for operating lease in FY16 as well if you could?
Christopher Wilks, Sonic Healthcare - CFO
Look, I don't have that number off the top of my head. Maybe this is the reason I've been left out Dave. Again, I don't think -- we don't specifically disclose that. Obviously, the operating lease is all around large, big collection centres. We don't lease equipment as such. We buy all our equipment and have done for some years. That's a little bit of a function of what would happen with the regulation, and whether that keeps the momentum or starts to slow down.
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David Stanton, CLSA - Analyst
Thank you, and then finally for me -- back to Colin. You have historically given us some kind of clues or colour around percentage margin growth in some of your divisions, namely UK and Germany. I wonder if you could help us in that regard.
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So Dave, sorry, but we're not giving out those numbers. So I can't give you any guidance. I mean, you can work out for yourself that if we're talking about strong earnings growth in the US, the margins are going to be pretty healthy. In the UK, it's a little different, because that revenue growth is coming from a joint venture. We don't want to break out margins. We'd have to announce them, then. David, and then we're going to go to the phones.
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David Lowe, Deutsche Bank
Thanks for that, David Lowe from Deutsche Bank. Colin, just a clarification on that issue. I think Matt's question, he was asking whether earnings were going to expand again in Australia after they contracted. You've got another few months of Vitamin D. Will earnings get better this year?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Yes, so in Australia I guess we've got ongoing -- until we cycle through fee cuts, we've got ongoing collection centre infrastructure costs. So the earnings growth in Australia is going to be muted. It's not going to be negative. It's not going to be terribly strong. So that's about it and all I want to say.
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David Lowe, Deutsche Bank
In line with expectations. Just switching back to the US, CBLPath is being cleaned up. Plenty of savings coming. From the outside, that was a bit of a shock. We didn't realise it was deteriorating as quickly as it did. What have you learned from that? From our perspective, what's the risk that we see another division or part of an operation suddenly decline without much warning?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So first of all, CBLPath is an exceptional business in the whole of Sonic Healthcare's stable of companies. It's an anatomical pathology business in the USA. We don't have any other business like that. The second thing is that it was hit by an unprecedented phenomenon in the US which is a phenomenon called insourcing, which can't happen elsewhere.
So just to give you an overall sense, we don't do anatomical pathology in Germany, for example. We do a lot of it here in Australia. It can't happen. Insourcing means that a large group of, let's say, gastroenterologists in practice -- say, 20 of them -- they decide to put their own lab in-house and keep all their histopathology to themselves rather than send it to an outside lab. This was a phenomenon that took place rather unexpectedly and fairly soon after we made the CBLPath acquisition. So whilst we did extensive due diligence on that business, this was something that we couldn't really see coming nor could anyone really.
The good news is that due to fee changes that came along with Obamacare and a variety of other changes that have happened, the insourcing has not only stopped, it's reversing. That's not the reason for the turnaround at CBLPath. So you can imagine CBLPath lost quite a lot of its revenue as a result of the insourcing which, when you've got a lab with fixed costs, becomes a real problem even though it's a histopathology lab. So bottom line suffered fairly significantly.
The restructure that's taken place has been very dramatic I have to say. Very courageous for all those people involved, especially the people at CBLPath. It's been done in a very sensitive way, yet firm and decisive so everyone is on board with the change. There's been dramatic reduction in staff levels. There's been a whole range of other changes including billing changes, cleaning up of a variety of processes, shedding business that was not profitable and more and more.
So it's been a wonderful exercise and I think Chris was involved in this and I publicly congratulate him on the leadership he showed with that together with a bunch of our people in the US. So this is a very difficult thing to do. I mean to turn a business around by more than AUD10 million at bottom line is huge, certainly unprecedented in Sonic's case and in Sonic's history and we're very confident about going forward on a new footing.
So you've got a business now that's much leaner and much more efficient and in a regulatory setting that is more favorable. So this business -- we're actually now getting quite confident about and we've seen -- so this is not just prediction, we've got actuals coming through which confirm the good work that's been done. So we're quite optimistic about this business going forward and it will drive a large part of the turnaround in the US business as a whole. So I mean you're going to get a swing here of more than AUD10 million. That's big.
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David Lowe, Deutsche Bank
Okay, thanks very much. We couldn't let you get away without a question on Alberta and Canada. I mean the question that sort of springs to mind is are there other opportunities out there? I mean let's exclude the UK because I think we recognise that there's things happening there. But outside the UK, are there contract opportunities that Sonic can see in the next 12, 24 months?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Yeah, so there's nothing on the immediate horizon but I'm certain that there will be big contract opportunities given what's going on in the UK and given the general consensus of governments around the place that the lab business will be much more efficiently run in private hands.
We were extremely unlucky in Alberta that after 43 years of conservative government in the province of Alberta it suddenly changed. I mean nobody saw it coming and it happened right at the wrong time where we were nearing the signing of our contract. We were in the final stages of negotiation and bang, the government changed it after 43 years. This was a left-wing government, ideologically opposed to privatisation of healthcare services. That was their campaign platform -- one of their campaign platforms.
So we recognised that this was going to be something of a problem. You know, everything was going so well with Alberta Health Services. Not just with them. I mean they were so positive about Sonic as were we with what was ahead. The medical community in large -- at large extremely positive about Sonic and we've spoken about why that was the case, our medical leadership model and what we could offer Edmonton and Alberta through our international exposure and our capabilities. So this was extremely unlucky.
The good thing was that we hadn't put any numbers from Alberta into our forward forecasts and so really it should not be material to our share price at all. It's very disappointing because we have put in a lot of work. We will be largely refunded for expenditure incurred along the way. That was in the deal. Are there going to be further opportunities in Alberta and in fact in Canada? There could well be. We don't know exactly how it's going to pan out in Alberta. I think this contract has been cancelled, there's no doubt about that.
The minister -- the new health minister has announced a review of laboratory services in Edmonton and surrounds. I don't know what'll come out of that. I suspect it won't be another RFB like we've done. But could there be opportunities elsewhere in Canada? Yes is the answer. We've been inundated with mail from all over Canada so people -- it seems like there's a lot of disappointment that this didn't go through at least from certain sectors of the medical community.
In terms of other countries, yes I mean even in Australia there could well be opportunities of privatisations and there certainly are big opportunities in terms of contracts here in Australia. You know, so we're in discussions with a variety of health funds and other stakeholders in the healthcare sector where there will be contract-based business coming our way.
We are in a very fortunate position here in Australia because we cover the waterfront in terms of primary care coverage right across the country medical centres, pathology right across the country and radiology in a very significant part of the country. So we have something very special to offer contractors of healthcare services going forward here in Australia. But I predict that the contract business will increase progressively as Sonic progresses into the future.
Ian Abbott, Goldman Sachs
Great. My question is quite a big picture question Colin and one of the great things about pathology generally is the fixed cost leverage within the business. You know, you add a little bit of incremental revenue and it usually comes through at a very high incremental margin. I know in the past you've talked about incremental margins on that, you know, in the high 20%s and even the low 30%s. Your guidance for next year sort of implies an incremental margin of about sort of 16% or 17%. I'm just wondering firstly what's sort of holding back the incremental margin in 16% and do you see a point sort of in the future where again Sonic can deliver incremental margins into the high 20%s?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Yes, I think that's a very good question. In general that principle still applies to our business and in a steady state with technology advancing all the time in the lab we will be able to lift margins going forward. So it's not -- just to give you an idea of when I say technology I apply that to many sub-disciplines of the pathology business. So, for example, more and more tests are becoming automated. They move from being manual to automated and you get a marginal benefit out of that. We're right now busy installing total lab automation tracking systems in labs and, you know, in the next few years hopefully roll them out throughout all our labs. That gives greater efficiency in incremental margin benefits.
There are other things that we're doing in our business like say, for example, procurement initiatives where we use our global scale to reduce test consumable pricing. That improves our margins as well. Where the model comes unstuck though is where we have fee cuts and fee cuts, you know, have been going on all the time. This is not something new and it's not something that should scare any investor because, you know, you can go back 30 years, there have always been fee cuts. Remember, the reason why there are fee cuts is that payers are desperately trying to put a lid on the demand, it is so strong. The demand for lab tests continues to increase.
So if you look at our Australian business right now we've had some fee cuts and we had one last year so that sets back the margin growth story because the fee cut comes straight off the bottom line. You don't change anything else. If we have changes in the US which we've had, that would retard margin growth as well. But in a country like, for example, Switzerland where there's been a fairly stable regulatory environment, margins grow.
Even in say Germany, for example, where we have had quasi cuts in our fees, all the work that we're doing has overwhelmed that in a sense and we have had margin growth fairly significant over the years -- the recent years.
So we're still confident about that model and it certainly does continue to apply. Sorry, it's been a little bit long-winded Ian.
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Ian Abbott, Goldman Sachs
Oh that's alright. Thanks for the detail and just perhaps to tie it back to 16%, would it be also fair to say, you know, there's quite a bit of new incremental revenue from the UK. Is that another reason perhaps why the Group's incremental margin is likely to be down?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So the UK is an interesting one because we've now put into a joint venture a bunch of labs but we're building a central lab. Whilst we hold these separate labs, yes margins are going to be lower and so there will be a drag on our private business margins. But once we've centralised all this testing into our super ultra-modern Halo Building lab in Central London our margins are going to lift quite dramatically. So we're going to get all kinds of benefits from scale, centralisation, efficiencies, track systems, et cetera. So that's a unique situation in the UK.
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Ian Abbott, Goldman Sachs
Is that a 17% -- is that margin upside of that a 17% or an 18%?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
It's 17%, starting at 17%.
We can look forward to something really positive in the UK starting at 17%. I mean it's very positive right now actually, very positive. But in terms of margin lift, starting 17%, 18%, 19%, I think it's going to be very exciting and we've got decent scale there as well now. Another question off the phone please.
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Chris Kallos, Morningstar
Thank you for taking my question. Colin, I've just got a quick one, big picture on the US in terms of acquisitions and your capacity. Where do you see the opportunities?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Okay, so in the US we're obviously pushing a number of opportunities. We've got a lot of initiatives in place to drive organic growth based on a differentiated model which we have not really pushed very hard to date. So of all the countries in which we operate, Sonic's medical leadership model has not been capitalised upon to the extent that it has in other countries.
As you know, we have a new CEO in place in the US, Dr Tom Lohmann, and he is in the process of building a new team and building a strategy around our culture and philosophy of medical leadership together with a few other offerings which are unique as well.
So in a slightly different environment in the US where there's more of a focus on I guess quality and more where -- we're moving more towards I guess a sort of contracted type arrangement, Sonic's offering will be of a big advantage. So this is a combination of our medical leadership model and a variety of IT&E health solutions particularly in the area of disease prevention.
So we're quite optimistic about where we're going with organic growth and funding so negotiating directly with payers using a differentiated model. But then moving on beyond that there are also opportunities for acquisition for Sonic going forward. Again, labs that have not sold to other competitors, who have not sold to private equity, who identify with Sonic's model.
So we do see further opportunities for growth in the US as the market stabilises there. So it's been a little destabilised if I could put it that way up until about six, 12 months ago but it definitely appears to be in a much more stable position now with growth rates of the market trending back to historic growth rates and I guess the whole market just settling down which you can see in Sonic's business as well.
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Sean Lehmann, Morgan Stanley
Good morning. Just a quick one from me Colin. Just with Prendia and Switzerland, is that going to be material given that it removes the necessity for that Trans-Atlantic journey?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
No, in the scheme of the whole of Sonic Healthcare probably not but it is a significant test for us. You know, I can't break out the numbers off the top of my head but I do know, for example, that -- so we're not going to be sending our global NIPT testing into Geneva. That's not the plan. We will be bringing this test in-house into selected other labs around Sonic. Not the Prendia test necessarily but one of the other tests offered by Californian companies which we will licence to bring in-house.
So, for example, we are bringing in one of those into our lab in London and we will shortly be bringing one of these tests in-house into one of our labs in Australia as well. So all our volume in Australia -- this is a big test and quite an expensive test. Remember this is a test that bills out at AUD400 to AUD500 a test. We will not be sending overseas but doing in-house which will certainly be a better proposition for us but in the scheme of the whole company probably not material.
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Victor Windeyer, Citigroup
Victor Windeyer from Citi. Look, I just wondered if you could maybe give us an update on your view of where the Medicare review of the CLFS is?
Colin Goldschmidt, Sonic Healthcare Limited - CEO
C-I?
Victor Windeyer, Citigroup
CLFS, clinical fee lab schedule.
Colin Goldschmidt, Sonic Healthcare Limited - CEO
So I think it's, with fingers crossed, fairly good news on that one because I think what you're referring to is the review of the entire schedule, the Medicare schedule in the US which was due to come into effect in 2017. Some important deadline dates have passed leading into this and the consensus amongst industry players and industry associations in the US is that it's definitely going to be delayed because the deadlines have been missed. Some are even suggesting that possibly they won't happen at all.
So I say this -- again, I say this in a guarded way but that's really how it's looking. So I've spoken to a lot of people about this and that is the general view. I think there is a sense around the Medicare world in the lab industry in the US that perhaps these are not called for at this point in time given what's happened in the market over the last two, three years. So anyway, we'll keep you informed but at the moment that's the state of play.
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Victor Windeyer, Citigroup
Okay, thanks. Then just on Germany, this talk about clawing back the underpayments and the KVs, are we still anticipating at present or where's that up to currently?
Evangelos Kotsopoulos, Sonic Healthcare Germany - CEO
So we have received some money back from previous quarters where there were miscalculations. That doesn't go against the position which has been disclosed previously in our accounts, the receivable and on that the legal process is ongoing right around the country. So no news. It would be a nice windfall in cash if it came but we just can't tell at the moment.
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Will Dunlop, BofA Merrill Lynch
Just wondering if you could perhaps give us some indication as to the quantum of US cost reduction that you're referring to in terms of a renewed focus on costs because obviously you've taken quite a bit of cost out of the US business in recent years. So just wondering if this is something that's material or if it's just part of a new strategy in the US.
Colin Goldschmidt, Sonic Healthcare Limited - CEO
Will, it is material but I'd rather not give out numbers if you don't mind. It's a kind of sensitive number not just for the markets but internally in Sonic as well. So this is in addition to the regular cost initiatives that are going so there is specific areas of our business in the US where, in addition to CBLPath, where we are looking at reducing costs in a focused way. So these were not just words in the presentation, they're real. Are they going to be material in the scheme of the whole year -- yes they are going to be material. So you're talking several millions coming out in FY16.
The big thing in the US, I just need to stress again, is not -- is the CBLPath turnaround and suddenly we're getting decent top-line growth, a critical thing. So, you know, it's just one of the painful things to go through in a market unusually but I think it's because of all the political change or politically-driven Obamacare in particular driven uncertainties in the market that caused it to go flat for two or three years. So that's the best news in the US.
Okay, is there one more on the phone or have we finished on the phone Joel?
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Ian Abbott, Goldman Sachs
Just a very quick one. I'm wondering if you can update on expectations for CapEx and intangible spend for next year.
Christopher Wilks, Sonic Healthcare - CFO
Can you hear me? Yes, hello. Yeah look the CapEx, when you go through the numbers you'll see it is relatively high. That's more to do with some one-offs. We do tend to have quite a few one-offs as we're building our property portfolio. We're spending a fair bit up in Queensland in Brisbane where we're building a new facility. We've bought a building in Hawaii not far from Pearl Harbour where we'll be building our new facility there to integrate about three facilities. So there's some one-offs related to that.
In addition, the joint venture in the UK had some movement of assets from the joint venture partners into the joint venture vehicle so that appears as a CapEx number effectively as well. So when you back out all of that I think you'll find that our CapEx is about 115%, something like that, of our depreciation. That's where -- somewhere about 110%, 115% is where I think the maintenance CapEx sort of sits as we evolve and bring new technology into the business. But it will be effected a little bit in this coming year as well by the finishing of the building in Queensland and there's also an extension of the facility in Ingelheim. So you'll see a little more CapEx again this current year and then I think we should have a bit of a break from building new labs.