Attention ASX Company Announcements Platform Lodgement of Open Briefing ASX ANNOUNCEMENT: 26 August 2010 CEO on FY10 Results & Outlook Open Briefing with Pro Medicus Limited 450 Swan Street Richmond, Victoria 3121 In this Open Briefing CEO discusses Full year results in line with guidance Visage Imaging sales in Australia drive second half growth Strong potential in the US and Europe for new generation imaging products Open Briefing interview: Pro Medicus Limited (ASX: PME) today reported net profit of $3.9 million for the year ended June 2010, down 22 percent from the previous year. The second half saw a turnaround in underlying earnings, with profit of $2.7 million, up 5 percent year on year, versus $1.2 million, down 50 percent, in the first half. What were the key drivers of the improved second-half result and is the improvement sustainable in the current year ending June 2011? We re pleased to have delivered a full year result in line with our guidance and above the consensus earnings forecast. We received several large local orders for our new Visage Imaging technology at the end of the first half and they were deployed in the second half. A number of smaller deals in the US and Europe also contributed to the better second half results. We think the improved second half result validates our acquisition of the Visage technology and our commitment to a fully integrated 3D picture archive communication system (PACS) and radiology information system (RIS) strategy. In a highly competitive environment we ve been able to cross-sell to our existing installed client base as well as secure new clients. The Visage technology can be successfully deployed in any radiology environment, including not just imaging centres but also hospitals, which opens up a market previously only partially accessible to us. We expect the technology to make a significant contribution to our financial performance over time. You ve reinstated dividends, after suspending the interim payment, with a dividend of 2 cents at the end of the year. This is equivalent to a yield of 4 percent at current share price Open Briefing Pro Medicus Limited 26 August 2010 1
levels, and represents a payout ratio of 51 percent of full-year earnings, down from 70 percent in 2009. Post the acquisition of Visage, what is your dividend policy for the expanded business? It s pleasing that we have been able to resume the payment of dividends. The payout ratio is below our historical trend due to the continuing investment we re making in our new breed of products which we are progressively introducing to the market. As the company s profits and cash flow increases, it is the Board s intention to increase the level of dividends and to return the payout ratio closer to historical levels. The lift in second-half profit was largely driven by Pro Medicus Australian segment, which booked pre-tax profit of $4.0 million in the second half versus $1.2 million in the first half. To what extent was the growth driven by sales of Visage products and what opportunities remain in this market? The growth in our Australian earnings in the second half was driven by sales of both Visage and Pro Medicus technologies. The market is just beginning to recognise the value of our 3D PACS (2D + 3D) on a thin client platform, which allows very large data sets to be transmitted in spite of bandwidth limitations and gives practitioners better access to the full imaging capabilities of the latest CT and MRI scanners. This suggests to us also that there s a replacement market for existing 2D technology that s only just developing, and which we re positioned to participate in and potentially lead. The European segment booked pre-tax profit $2.4 million for 2010, with the second half contributing $1.0 million versus a first half contribution of $1.4 million. To what extent did the weaker performance reflect external factors and to what extent internal factors? Lower second half profit was mainly due to the impact of unfavourable exchange rate movements. In the first half, the average Euro exchange rate was $1.67. For the full year it was $1.58. At constant currency rates, the outcome would have been an overall contribution of $2.7 million from Europe with $1.4 million in the first half and $1.3 million in the second half. The North American segment continued to be loss-making, booking a pre-tax loss for the year of $2.1 million, compared with $0.8 million in the previous year. What are the key factors that are expected to lead to the North American operations achieving profitability in the current year? We ve enjoyed moderate success in the US with installations of our 3D technology at numerous prestigious hospitals, including two regarded as being among the top 20 hospitals in the country. Sales last year to Brigham and Women s Hospital, University of Chicago and University of Texas were significant accomplishments. Open Briefing Pro Medicus Limited 26 August 2010 2
These 3D appliance sales have seen relatively low value but our higher priced new Visage Universal viewer and 3D PACS position us to make higher value sales. We ve added significant channel partners to our own direct sales capability which has broadened our customer interface. We believe the increase in our channels to market will deliver more success over the next 12 months. A promising trend has been some of these partners employing a pay per use licensing model which is being applied to Pro Medicus/Visage technology and which has the potential to gradually build annuity revenue streams for the company. These channel partners are using their sales force and market presence to establish our brand with large healthcare enterprises and hospital clusters. In both the European and North American markets you ve adopted a hybrid of direct and indirect channels to market. What s the rationale for using the hybrid model in these markets and how does profitability vary between the two models? The European and North American markets are large and complex and it became clear that we wouldn t have much reach into these markets without some additional boost from partners with shared interests who can provide much needed market access. These markets are diverse, including hospitals, imaging centres, orthopaedic and cardiology practices, as well as various languages and cultures, and our partners have specialist knowledge of these different segments. We ve been fortunate to team up with some very strong and well connected partners such as Accelarad in the US and Telegentis in Europe. The margin on sales made through these indirect channels will be slightly lower than our own direct sales, but of course the cost of sales is also lower so there is an offset. What is the potential market for your next generation imaging products in Europe and North America and what is your competitive position in these markets? The architecture of most PACS available in the market today didn t anticipate the rise in data volumes created by the latest multi-detector and multi-slice scanners. Client RIS and PACS databases can t cope with the rate of increase in data volume after they purchase new scanners. Our market potential is substantial as Visage products deliver additional life and functionality to existing PACS systems. Visage s 3D visualisation product allows reconstruction of CT and MRI images in 3D. Visage is also one of the few providers of commercialised thin client distribution technology, allowing images to be accessed in seconds on virtually any PC without enormous computer and network memory requirements. The market for volume image reading will continue to grow as customers confront the logistics of dealing with massive and increasing data sets. With our broad range of capabilities and our wide geographic footprint, we re in a position to service clients around the world, especially in the large hospital and enterprise space. Open Briefing Pro Medicus Limited 26 August 2010 3
Total cash expenses were $12.0 million in 2010, up from $8.4 million, primarily reflecting increases in employee expenses, depreciation and amortisation, and advertising. Given 2010 was your first full year since the acquisition of Visage, how indicative are the 2010 expenses of the expected level going forward? This isn t a like-for-like comparison given Visage was included for only five months in 2009. If we annualise Visage s expenses for 2009, our cash expenses for that year would have been around $13.1 million, so in like-for-like terms we ve actually reduced costs since the acquisition. In the US we ve reduced costs by restructuring our organisation and our sales channel mix. We have of course boosted local R&D over the last 12 months to see us through completion of our new RIS development, but don t expect costs to remain at the 2010 level in the period ahead. Pro Medicus booked operating cash flow of $6.8 million for 2010, up from $5.5 million in the previous year. With investment outflow of $6.1 million, free cash flow fell to $0.7 million from $1.1 million. Most of the investment was in product development, spending on which increased to $5.9 million from $4.3 million. When do you expect the current product development cycle to peak and what is the outlook for free cash flow? The current product development cycle is expected to peak in the first half of this financial year. We expect product development expenses to plateau and then decline in relative terms. We also expect cash flows from operating activities to continue growing in line with increased sales activity. Cash stood at $3.8 million as at the end of June, up from $3.3 million six months earlier. Do you have adequate balance sheet capacity to grow the business in the nearer term? We have adequate cash to internally fund our future growth requirements. Customer receipts from current deployments are expected to be received in the first half of 2011. What are the major growth opportunities for Pro Medicus now that you ve successfully merged the Visage business? We have many opportunities but growth will primarily come from our ability to cross-sell Visage 3D PACS to our installed base, both domestically and overseas. We also expect the technology to start gaining traction in the replacement technology market, which is a large potential market. Prospects look increasingly bright for significant sales into hospitals as our direct sales team gains traction and as our new channel partnerships progress. Our own second generation RIS Open Briefing Pro Medicus Limited 26 August 2010 4
will be launched this calendar year and the Amira Life Science product portfolio is already growing at a double digit rate. The e-health trend across world health markets will continue to benefit us given it will generate growing demand for quick access to 3D images. Thank you David. For more information about Pro Medicus, visit www.promedicus.com or call David Chambers on +61 3 9429 8800. For previous Open Briefings by Pro Medicus, or to receive future Open Briefings by email, please visit www. DISCLAIMER: Orient Capital Pty Ltd has taken reasonable care in publishing the information contained in this Open Briefing. It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information. We strongly advise that you seek independent professional advice before making any investment decisions. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use. Open Briefing Pro Medicus Limited 26 August 2010 5