Integral Diagnostics : HY Results, Acquisition and Entitlement Offer Media Release

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www.integraldiagnostics.com.au

ASX & MEDIA RELEASE

Integral Diagnostics reports 1HFY22 Results, Acquisition of Peloton Radiology and $90 million Entitlement Offer

23 February 2022, Melbourne

Integral Diagnostics Limited (ASX: IDX) announces its results for the half year ended 31 December 2021 (1HFY22). These results are consistent with the Market Update announcement on 27 January 2022.

Group summary

• Key financial measures for the half year ended 31 December 2021 are:

1. Operating EBITDA $39.5 million (21.9% margin) on operating revenue of $180.5 million

• 1. Operating Diluted EPS of 6.4 cents on operating NPAT of $13.0 million o Statutory NPAT of $10.2 million after customer contract amortisation,
     transaction and other costs of $2.8 million
     o Free cash flow of $24.8 million with net debt of $176.8 million
• Interim dividend (fully franked) of 4.0 cents per share payable on 4 April 2022, representing a 70% payout ratio in line with historical levels
• Announcement of acquisition of Peloton Radiology and an Entitlement Offer which is expected to deliver low single digit pro forma FY22 EPS accretion before ongoing synergies and one-off integration costs1

As previously announced on 27 January 2022, 1HFY22 was impacted by COVID-19 and the associated government responses which included government-lockdowns and border closures across all geographic areas in which we operate. The impacts include:

• Reduced patient activity due to:

1. Restrictions on elective surgery

• 1. Patients' reluctance or inability to attend healthcare services o Staff shortages requiring site closures or reduced operations
• Increased employee costs due to an increased use of sick leave, a reduction in annual leave taken and border restrictions impacting staffing
• Increased consumable costs due to ongoing use of personal protective equipment
• Supply chain disruptions for equipmentdeliveryand repairs resulting in delays in organic growth initiatives and increased downtime of equipment

In addition to the COVID-19 impacts, New Zealand revenues have also been impacted, to a significantly lesser extent, by new referrer-owned radiology practices in Auckland. The

1Pro forma FY22E EPS accretion assumes the Acquisition was effective from 1 July 2021 and that Peloton Radiology's FY2022 EBITDA of $8.0m reflects 7 months of actual trading (unaudited) which includes the impact of COVID-19, especially in December and January, plus 5 month forecast which assumes performance is no longer impacted by COVID-19, adjusted for items including one-off expenses, and identified growth and cost saving initiatives. The Acquisition is expected to be accretive on a pro forma FY22E basis both before and after application of the adjustment contemplated in AASB 133 under which EPS is adjusted to reflect the bonus element of the Entitlement Offer.

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Company is working with industry and regulatory authorities to maintain professional, quality, arms-length referral practices that protect patient interests.

While 2HFY22 performance to date continues to be impacted by COVID-19, there are some early signs that patient volumes are returning, especially in our Queensland operations, albeit the impact of COVID-19 on 2HFY22 results remains uncertain.

Key financial measures

			1H FY21
			E xcluding
$ million	1HFY22		J obKeeper			Change
Profitability
Operating revenue2	180.5	170.7	9.8	5.7%	▲
Operating EBITDA ($)	39.5	42.5	3	(3.0)	(7.1%)	
Operating EBITDA (%)	21.9%	24.9%	4			(3.0%)	
Operating EBITA	23.4	27.2	5	(3.8)	(14.0%)	
Operating NPAT	13.0	16.6	6	(3.6)	(21.7%)	
Operating Diluted EPS (cents)	6.4	8.3	7	(1.9)	(22.9%)	
Statutory NPAT	10.2	19 .9	(9.7)	(48.7%)	
Cashflow & Capital Management
Free cash flow	24.8	33.2	8	(8.4)	(25.3%)	
Free cash flow conversion, net of replacement capex (%)	73.4%	93.9%			(20.5%)	
Interim Dividends declared per share (cents)	4.0	5.5	(1.5)	(27.3%)	
Net debt (pre-AASB16)	176.8	137.3	39.5	28.8%	▲
Net debt / proforma LTM EBITDA (pre-AASB16)9	2.5x		1.6x				▲
Equity	267.0		253.4		13.6	5.4%

Despite recent challenges in the operating environment, the Company has delivered organic revenue growth of $7.4m or 5% in Australia and an organic revenue decline of ($3.9m) or (18%) in New Zealand. The Company continues to maintain its focus on executing its organic and inorganic growth strategy. In 1HFY22 $14.6m was spent on capex in line with expectations, with $10.4m relating to growth initiatives including the development of three new sites. In addition, the Company continues to progress its pipeline of bolt-on acquisitions that are both strategic and earnings accretive.

1. Represents operating revenue and excludes other revenue in 1HFY22 of $1.0m (1HFY21 $1.0m)
2. The 1HFY21 EBITDA excludes the receipt of $9.5m of gross JobKeeper receipts for 1HFY21, inclusive of these receipts 1HFY21 EBITDA was $52.0m.
3. The 1HFY21 EBITDA excludes the receipt of $9.5m of gross JobKeeper receipts for 1HFY21, inclusive of these receipts 1HFY21 EBITDA operating margin was 30.5%
4. The 1HFY21 Operating EBITA excludes the receipt of $9.5m of gross JobKeeper receipts for 1HFY21, inclusive of these receipts 1HFY21 Operating EBITA was $36.7m.
5. The 1HFY21 Operating NPAT excludes the receipt of $6.6m of net JobKeeper receipts for 1HFY21, inclusive of these receipts 1HFY21 Operating NPAT was $23.2m.
6. The 1HFY21 Operating EPS (cents) excludes the receipt of $6.6m of net JobKeeper receipts for 1HFY21, inclusive of these receipts 1HFY21 Operating Diluted EPS was 11.6cps.
7. The 1HFY21 free cash flow excludes the receipt of $9.5m of gross JobKeeper receipts for 1HFY21, inclusive of these receipts the free cash flow was $42.7m.
8. Based on net debt excluding the impact of lease liabilities of $176.8m (1HFY21: $137.3m). Pro-forma LTM EBITDA of $70.3m (1HFY21: $85.6m) excludes any impact of AASB 16 and includes trailing LTM EBITDA for acquisitions. This approach is consistent with banking covenant requirements.

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The Company is fully committed to maintaining and supporting our excellent team of radiologists and related medical specialists and technical staff through COVID-19 to continue the delivery of high-quality services to our patients as we see demand returning. Prior experience of operating in a post COVID-19 restricted environment has seen a return to historical levels of operations and a period of "catch-up" resulting in higher volumes of exams for some months. Maintaining our workforce and infrastructure to ensure we are well positioned to service increased demand when we return to pre-COVID-19 operating levels has required ongoing investment and has adversely impacted operating margins in 1HFY22. Where possible the Company has controlled discretionary costs.

We believe the underlying fundamentals of the radiology industry remain strong and the Company is confident that patient volumes and historical growth patterns will over time return to pre-COVID-19 levels, and that continued investment in our workforce and infrastructure has positioned the Company well.

IDX continues to provide patients and referrers with excellence in diagnostic imaging across Australia and New Zealand.

Dividend

A fully franked 1HFY22 interim dividend of 4c per share has been declared (1HFY21: 5.5c per share), representing a 70% payout ratio in line with historical levels. The decrease in the interim dividend on the prior corresponding period reflects the impact of COVID-19 on the performance of the business during the 6 months to 31 December 2021. Key dates for the interim dividend are:

Record date	2 March 2022
Final DRP election date	3 March 2022
Payment and issue date	4 April 2022

The Dividend Reinvestment Plan (DRP) will again be available for participation for the 1HFY22 dividend distribution.

Acquisition of Peloton Radiology

IDX has agreed to acquire Peloton Radiology (the Acquisition).

Peloton Radiology is a scale provider of diagnostic imaging services with a strategic presence from Brisbane to the Sunshine Coast in the high growth corridor of South East Queensland.

Peloton Radiology is both a strong clinical fit and strategically aligned with IDX. The Acquisition is compelling for IDX:

• Enhances IDX's presence in the high growth corridor of South East Queensland
• Provides radiology services at 9 clinics
• Comprehensive provider of diagnostic imaging services, with a highly diversified modality mix including nuclear medicine, CT and MRI and a modern, well-invested fleet
• 12 highly skilled and recognised radiologists
• 3 partial MRI licences

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• Pro forma FY2022 EBITDA of $8.0m10
• Implied acquisition multiple of 8.8x pro forma FY2022 EBITDA11
• Growth opportunities with various initiatives underway including increase in equipment fleet, expansion of service offerings and benefit from acquisition of additional site in December 2021
• Satisfies IDX's investment criteria:

1. Strong cultural and clinical fit

1. Attractive revenue growth profile o Attractive financial metrics
   o Multiple future growth avenues

The Acquisition is expected to be completed in 2022, subject to satisfaction of conditions precedent, including those described in the investor presentation for the Acquisition and Entitlement Offer released to the ASX today.

Dr Ian Kadish, MD and CEO of Integral Diagnostics, commented:

"We are delighted to incorporate Peloton Radiology into Integral Diagnostics. The group's radiologists and staff represent a strong strategic and cultural fit with IDX's doctor led operating model.The Peloton Radiology group adds real value to IDX's market leading model and it significantly extends our presence in the Queensland market. We extend a warm welcome to the Peloton Radiology doctors and staff and look forward to partnering with them to further grow our combined business."

Dr Richard Langford, the founder of X-Ray and Imaging, said:

"We are delighted to be joining the IDX group and to jointly grow our radiology services in Queensland".

Dr Antony Pais, the Clinical Director of Citiscan, said:

"Citiscan is also delighted to be joining IDX, and is looking forward to engaging with the wider IDX community of radiologists to build on the technology and clinical leadership programs that are being developed".

And Dr Paula Sivyer, the founder and Clinical Director of Brisbane's Diagnostic Imaging Centre for Women (DIFW), said:

"DIFW is looking forward to collaborating with and contributing to the IDX network of specialty Women's Imaging Centres".

Acquisition funding

IDX has agreed to acquire Peloton Radiology for ~$66.5 million12 on a cash and debt free basis (Upfront Consideration), which is payable 90% in cash and 10% in new ordinary IDX shares.

The Upfront Consideration will be funded by:

• A fully underwritten 1 for 7.75 pro rata Accelerated Non-Renounceable Entitlement Offer to raise ~A$90m, offered at A$3.44 per new ordinary share (Entitlement Offer); and

1. Peloton Radiology's FY2022 EBITDA of $8.0m reflects 7 months of actual trading (unaudited) which includes the impact of COVID-19, especially in December and January, plus 5 month forecast which assumes performance is no longer impacted by COVID-19, adjusted for items including one-off expenses, and identified growth and cost saving initiatives.
2. Implied enterprise value includes the upfront consideration of $66.5 million (as outlined in footnote 12) and the total net earn out payments of $4.0 million. Peloton's FY2022 EBITDA is as outlined in footnote 10.
3. Purchase price is on a cash-free and debt-free basis and will be adjusted for the value of cash, debt and debt-like items

at completion of the Acquisition

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• New IDX shares issued to the Peloton Radiology vendors at $3.44 per share at completion of the Acquisition (Scrip Consideration)13,14.

The Acquisition is expected to deliver low single digit pro forma FY22 EPS accretion before ongoing synergies and one-off integration costs.15

The Entitlement Offer also provides IDX with additional balance sheet flexibility to support investment in identified bolt-on M&A opportunities that are aligned to IDX's strategy. IDX's net debt / LTM Dec-21 pro forma adjusted EBITDA at completion of the Acquisition is expected to be ~1.9x16.

Peloton Radiology's doctors will be incentivised to remain significantly invested in the combined group through ongoing employment arrangements, as well as the opportunity for ownership of IDX shares.

Subject to the business achieving certain retention and integration objectives, additional earn outs are potentially payable to Peloton Radiology's vendor radiologists under two distinct earn out limbs ending 30 June 2023 and 30 June 2024. Total net earn out payments are expected to be $4m.

Jefferies (Australia) Pty Limited will act as financial advisor for the Acquisition and Lead Manager and Underwriter to the Entitlement Offer.

Entitlement Offer

IDX is undertaking a $90 million Entitlement Offer at an offer price of $3.44 (Offer Price) per new share issued in IDX (New Shares). The Offer Price represents:

• 10.0% discount to the dividend-adjusted theoretical ex-rights price of A$3.82 (TERP)17; and
• 11.1% discount to the dividend-adjusted closing price of IDX shares on ASX on 22 February 2022 of $3.87.

Approximately 26.2 million New Shares will be issued under the Entitlement Offer. Each New Share issued under the Entitlement Offer will rank equally with existing IDX shares on issue at allotment, but will not be eligible for the 1HFY22 interim dividend of 4 cents per share. IDX will, upon issue of the New Shares, seek quotation of the New Shares on the ASX.

1. Shares issued as Scrip Consideration will be issued at the same price as new IDX shares issued under the Entitlement Offer
2. IDX shares to be issued to certain Peloton vendors will be escrowed. Subject to certain limited exceptions, the release of escrowed shares occurs in equal tranches on the first, second and third anniversaries of the issue of the relevant shares.
3. Pro forma FY22E EPS accretion assumes the Acquisition was effective from 1 July 2021 and that Peloton Radiology's FY2022 EBITDA of $8.0m reflects 7 months of actual trading (unaudited) which includes the impact of COVID-19, especially in December and January, plus 5 month forecast which assumes performance is no longer impacted by COVID-19, adjusted for items including one-off expenses, and identified growth and cost saving initiatives. The Acquisition is expected to be accretive on a pro forma FY22E basis both before and after application of the adjustment contemplated in AASB 133 under which EPS is adjusted to reflect the bonus element of the Entitlement Offer.
4. Based on pro forma net debt of $151.1m and pro forma Dec-21 LTM EBITDA of $77.7m for PF Combined group on a pre AASB-

1. basis.
2. The theoretical ex-rights price (TER P) is the theoretical price at which IDX shares should trade after the ex-date for the Entitlement Offer. TERP is a theoretical calculation only and the actual price at which IDX shares trade at that time will depend on many factors and may not be equal to TERP. TERP is calculated by reference to IDX's closing price of $3.91 on Tuesday 22nd February 2022 and is adjusted for the 1H FY2022 dividend declared of $0.04 per share.

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