Sonic Healthcare issues steep profit downgrade

The pathology and radiology provider has cut its annual profit forecast by more than $100m, with inflation and currency headwinds taking their toll.

Sonic Health managing director Colin Goldschmidt at the company's offices in Macquarie Park, Sydney.

Sonic Healthcare has cut its profit forecast for the full year by more than $100m, with inflationary pressures, currency exchange headwinds and slower than expected benefits from margin improvement measures to blame.

The company’s stock plunged more than 10 per cent on the news before bouncing back to close 6 per cent lower at $25.01.

In mid-February, the pathology and radiology provider provided guidance for full year underlying earnings in the range of $1.7-$1.8bn, however warned at the time the figure was likely to come in at the lower end of this range.

The company on Tuesday updated this outlook, saying earnings were now likely to come in at about $1.6bn on revenue of $8.9bn.

“Organic revenue growth continues to be strong at 6 per cent for the four months to 30 April, 2024 (following 6 per cent in the first half of FY24),” Sonic told the ASX in a statement.

“However, profit growth has been lower than expected, in part due to inflationary pressures on the business, and exacerbated by currency exchange headwinds.

“In addition, a number of margin improvement initiatives planned for completion in the second half of the financial year have been slower to deliver than expected and will contribute to further earnings growth in FY25.”

Revenue in the 2023 financial year was $8.2bn.

Sonic is forecasting profits to reach $1.7bn-$1.75bn on a constant currency basis next financial year.

“The FY25 forecast includes the negative impacts of the potential USA PAMA (Protecting Access to Medicare Act) fee cut ($15m), initial losses on the UK Hertfordshire & West Essex NHS contract ($10m), and an equity accounted loss for Franklin.ai ($5m),” Sonic said. “Guidance for FY25 will be updated/confirmed at Sonic’s full year results’ release in August 2024.”

Sonic chief executive Colin Goldschmidt said 2024 was a year of transition for the company, which was “moving away from pandemic conditions into a more normal business environment”.

“Our current robust top-line growth, organic and non-organic, in a setting of inflationary cost pressures, have combined to delay the completion of our programs to align labour costs more closely with post-pandemic conditions,” he said.

“These unique business conditions have also made forecasting our earnings unusually difficult this year.”

Dr Goldschmidt said the current year was also characterised by investment for future growth.

“In particular, the sizeable acquisitions of SYNLAB Suisse and Dr Risch (Switzerland), PathologyWatch (USA) and the Hertfordshire & West Essex contract win (UK), while initially earnings and/or margins dilutive, will all yield strong earnings growth and returns on investment into the future,’’ he said.

Sonic announced the circa-$190m acquisition of Dr Risch in March, saying at the time the business, which operates 13 clinical laboratories across Switzerland and a laboratory in Lichtenstein, would be earnings per share accretive from next calendar year.

“And the return on invested capital will significantly exceed Sonic’s cost of capital once synergies are achieved,’’ the company said at the time.

Dr Goldschmidt said overall, Sonic remained in “a very strong position, both financially and in terms of market positioning’’.

“We remain well set for growth in revenues and earnings going forward, including realising over the next two years the synergies and enhanced returns from the investments made this year,’’ he said.

“In managing our costs, especially labour costs, we have been mindful to protect our brands and to support our ongoing strong growth and the high quality of essential services we provide.”