please
CONCISE ANNUAL REPORT 2011 ABN 24 004 196 909 Directors Mr R.P. Campbell, Chairman Dr C.S. Goldschmidt, Managing Director Mr C.D. Wilks, Finance Director Dr P.J. Dubois Mr C.J. Jackson Mr L.J. Panaccio Ms K.D. Spargo Dr E.J. Wilson Company Secretary Mr P.J. Alexander Principal registered office in Australia 14 Giffnock Avenue, Macquarie Park, New South Wales, 2113, Australia. Phone: 61 2 9855 5444 Fax: 61 2 9878 5066 Website: www.sonichealthcare.com Share registry Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street, Adelaide, South Australia, 5000, Australia. Phone: 1300 556 161 (Within Australia) Phone: 61 3 9415 4000 (Outside Australia) Fax: 61 8 8236 2305 Website: www.computershare.com Email: www.investorcentre.com/contact Auditor PricewaterhouseCoopers Solicitors Allens Arthur Robinson Bankers Australia and New Zealand Banking Group Limited Citibank, N.A. Commonwealth Bank of Australia JPMorgan Chase Bank, N.A. Macquarie Bank Limited National Australia Bank Limited The Bank of Tokyo-Mitsubishi UFJ, Ltd The Hongkong and Shanghai Banking Corporation Limited The Royal Bank of Scotland plc Westpac Banking Corporation Stock exchange listings Sonic Healthcare Limited (SHL) shares are listed on the Australian Securities Exchange. Corporate Directory Contents 03 Chairman’s Letter 05 Managing Director’s Report 08 Financial History 10 Directors’ Report 37 Corporate Governance Statement 48 Concise Financial Report 65 Directors’ Declaration 66 Independent Auditor’s Report to the Members 68 Shareholders’ Information $3,096 Million Revenue CONCISE ANNUAL REPORT 2011 SONIC HEALTHCARE | 3 Chairman’s Letter My fellow shareholders, I am honoured to write to you as your Chairman for the first time, following the retirement of Barry Patterson from the Sonic Healthcare Board in late 2010. Barry was Chairman for eleven years and a Director for seventeen years, during which time the Company’s market value increased from around $20 million to more than $4 billion. Barry is a hard act to follow, but I am delighted to have taken up the Chairman’s role at a very exciting stage of Sonic’s development. The Sonic Board consists of four Independent Directors and four Executives. Kate Spargo and Jane Wilson joined the Board in July 2010 and have brought a wealth of valuable skills and experience. Their input and influence are already making a difference, and this will only increase as they become ever more familiar with the Company and its markets. The 2011 financial year was a challenging one, with ongoing foreign currency headwind, weak economic conditions and extreme weather in many of Sonic’s markets, and a full year’s impact of regulatory changes in the Australian pathology market. Ignoring the effect of currency translation, revenue grew 10%, EBITDA by 11% as a result of margin expansion, and net profit by 6%. The dividend per share was maintained at the prior year level, resulting in a payout ratio of 78% for the second year in a row, substantially higher than the long term trend of 70%. The Board recognises the importance of the dividend to our shareholders. The Company has started to reap the benefits of the investments we have made over the last six years to gain critical mass in the USA and select Western European pathology markets, and we are now at a point where realisation of these benefits will accelerate over the coming years. Our strategy in these offshore markets continues to be to use the highly successful model of medical leadership culture and a federated structure to consolidate fragmented markets, just as we did in Australia. Sonic is currently the largest participant in each of the Australian, German, UK and Belgium pathology markets, and number three in the USA and Switzerland. We are also the second largest player in New Zealand pathology and Australian radiology. By becoming one of the largest and most efficient operators in these markets we insulate ourselves against adverse regulatory changes and ultimately benefit as a result of further consolidation. Geographic diversification also mitigates the risk of regulatory change and was part of the rationale for the Company to expand into its current overseas markets. With a presence in eight countries, the Board believes that it is now appropriate to focus the Company’s efforts into synergy capture and earnings’ growth, in order to drive shareholder returns to higher levels. In conclusion, I am pleased to say that your Company is in a very strong financial position, with leading market positions and sound management, and is poised to deliver increasing shareholder value in the years ahead. I wish to acknowledge the work of my fellow Directors at Board level and to thank Sonic’s management teams and staff for their contribution to Sonic’s performance over the past year. Peter Campbell Chairman $295 Million Net Profit CONCISE ANNUAL REPORT 2011 SONIC HEALTHCARE | 5 Managing Director’s Report Sonic Healthcare has performed with distinction over the 2011 financial year, despite the challenging global financial markets and the headwind created by the strong Australian dollar. All Sonic divisions have delivered strong results, a credit to the expertise and dedication of our pathologists, radiologists, managers and staff around the world. Perhaps the most pleasing aspect of the financial results for the year was the performance of our Australian pathology division in the second half of the year, with revenue growth of 6%, organic market share gains, and significant margin improvement. These results followed a first half impacted by low market growth rates, fee cuts and other regulatory interventions. The new five year funding agreement from 1 July 2011 between the industry and Government will provide much needed stability and predictability going forward. Sonic is the market leader in Australian pathology, 24% larger by revenue than our nearest competitor. Our laboratory operations in the USA expanded further during the year, both through organic and acquisitional growth. In December 2010, Sonic acquired CBLPath, a leading anatomical pathology company based in New York. Then, in early calendar 2011, two high-quality clinical laboratories in California (Physicians’ Automated Laboratory and Central Coast Pathology Consultants) were added to Sonic’s USA operations. These latter two laboratories have formed the base for a new “Western Division” of Sonic Healthcare USA. All three acquisitions have integrated smoothly with Sonic’s existing operations and synergy activity is already well underway. Within six years Sonic has grown to be the third largest operator in the US laboratory market, with annual revenues of over US$700 million. The US laboratory market remains fragmented, providing Sonic with substantial growth potential into the future. As a result of clear market differentiation based on our unique corporate culture, philosophy and operating structure, Sonic has established a solid foundation in the US laboratory market. Our management teams and their staff have embraced the Sonic model and will use it to drive further value for Sonic for years to come. 2009 2007 198 2008 245 171 2010 293 2011 295 Net Profit $M 2009 2007 1,886 2008 2,380 3,014 2010 2,995 2011 3,096 Gross Revenue $M 6 | SONIC HEALTHCARE CONCISE ANNUAL REPORT 2011 Sonic’s growth in Germany continued during the year, along with significant margin expansion as cost synergies and other operational improvements continue to bear fruit. In January 2011, a German head office was established in Berlin, in order to accelerate our national synergy drive in coming years. Sonic is the market leader in Germany with annual revenues of around €400 million. With a current market share of less than 10%, this is another exciting growth market for Sonic. Our subsidiaries in the UK, Ireland, Belgium and Switzerland also performed admirably during the year. The UK and Ireland are well positioned to grow via future government and private hospital outsourcing contracts, whilst in Belgium two acquisitions in January 2011 were seamlessly integrated into the Group, elevating Sonic to market leadership with further room for growth. The Radiology division, IPN, and Sonic’s New Zealand pathology operations also performed strongly during the year. Sonic Healthcare’s business model is centred on building a strong and successful company, in order to enhance value for all stakeholders. Our people represent the key stakeholder group and are pivotal to all outcomes of the model. Our management style, our unique Medical Leadership philosophy, our federated structure and our Core Values all serve to foster job satisfaction and fulfilment, to engender loyalty and passion towards the Company and to create the appropriate conditions for the delivery of outstanding customer service to referring clinicians and their patients. Sonic’s Foundation Principles articulate the essence of the Company – who we are, what our brand and image are and how we wish to be perceived by our customers and the broader community. The Foundation Principles provide a framework to facilitate the delivery of premium-level services in healthcare markets around the world. Sonic Healthcare operates via an extensive infrastructure comprising hundreds of laboratories, radiology clinics and primary care centres and thousands of collection centres and courier routes. Using this infrastructure, Sonic’s 25,000 staff provide essential healthcare services to over 75 million patients a year. Sonic’s business model is designed to enhance shareholder value by driving accretion in earnings per share and return on invested capital. The success of this model has been proven in Australia over the past two decades. Over the last six years the Company has invested heavily to establish significant market presences in large, fragmented northern hemisphere markets.