Title: Open Briefing . IBA Health Group. CEO on H1 Result &...

Title: Open Briefing . IBA Health Group. CEO on H1 Result & Outlook

Record of interview:

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IBA Health Group Limited recently reported a net loss of $1.2 million for the first half ended December 2007, compared with net profit of $11.8 million for the previous corresponding period. Excluding non-recurring items related to your acquisition of iSOFT on 30 October, IBA made an underlying net profit of $16.9 million, up 43 percent. Post the acquisition of iSOFT, which was
previously loss-making, can the merged group sustain an underlying profit going forward?

Executive Chairman & CEO Gary Cohen

Our business is sound and the merged group is profitable and highly cash generative. Many of the previous iSOFT financing arrangements are coming to an end – thereby freeing up lots of cash. In the second half we expect to record profits on both an underlying and reported basis. The iSOFT acquisition has completely transformed the group – it’s given us scale, a strong base in major
markets such as the UK and continental Europe, plus an industry-leading product suite that complements are own and development capability. iSOFT’s past performance is not reflective of the business as it stands today. Further, we’re well positioned to grow profits strongly particularly as there is a substantial degree of renewed confidence with our customers in our ability to deliver and be a good long term partner.

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EBITDA before non-recurring items $25.4 million, up from $15.9 million and the underlying EBITDA margin was 24.7 percent down from 43.7 percent. What was the operating and margin contribution of iSOFT in the two months
to the end of December and how does it compare with expectations?

Executive Chairman & CEO Gary Cohen

Over 70 percent of the revenues recorded in the period were from iSOFT.

Although iSOFT was running at a sub-10 percent EBITDA margin prior to the acquisition, the benefit of synergies, the tight cost control and the benefits of our traditional higher margin business has already seen the underlying margins improve significantly for the iSOFT business. Overall the iSOFT acquisition is tracking ahead of expectations in respect of margin convergence.

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IBA had reported net operating cash outflow of $24.0 million in the first half versus inflow of $11.2 million in the previous corresponding period. You’ve indicated that underlying cash flow from operations was $26.7 million. How do you reconcile the reported and underlying cash flows and is the underlying result indicative of cash flow going forward?

Executive Chairman & CEO Gary Cohen

The underlying cash flow is representative of the cash flow going forward. There were a number of substantial one-off cash items due to the acquisition of iSOFT most of which relates to the period pre-acquisition. Of the $50.7 million difference between reported and underlying cash flow, $24.2 million was due to pre-acquisition payments iSOFT had accrued in its accounts prior to our
refinancing of the iSOFT debt on more favourable terms.

Under an arrangement with the UK NHS three years ago - the Existing Services Agreement (ESA) - iSOFT arranged to receive substantial advance payments for recurring revenue that relates to maintenance fees for over 1800 contracts in the UK. The ESA expires in April and we won’t continue this practice in the future. The ESA impacted our reported cash flow by $12 million in the period.

Going forward our cash receipts will begin to match up with our reported revenue. With the expiry of the ESA we’ll pick up over $70 million of additional annual cash flow from next month. In addition, in return for the up-
front ESA payments iSOFT had to discount its products by 17 percent, and we’ll pick up this margin benefit after April as well.

Also in the past iSOFT selectively funded future sales using non-recourse financing arrangements, primarily in the UK, Irish, Dutch and ANZ businesses. We’ve ceased entering into any such arrangements due to their cost.
Approximately $70 million relating to these financing arrangements is expected to be repaid from the contract cash flows by the end of the June 2009 financial year as the underlying contracts are delivered.

Finally there was $6.5 million of one-off integration costs in the first half. So you can see why we expect a strong pick-up in cash flows as we move forward.

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As set out in the Appendix 4D financial statements, the iSOFT acquisition made a net profit contribution to the first half of $12.5 million before amortisation. Given group net profit before amortisation of $9.9 million, this
implies a net loss of $2.6 million from IBA’s existing operations, compared with profit before amortisation of $14.6 million in the previous corresponding period. Why has the existing business gone backwards and what is the
expected contribution going forward?

Executive Chairman & CEO Gary Cohen

It is not an accurate representation to split the reported earnings in that way.

We didn’t split out our corporate overheads or one-off costs across the business. We incurred substantial integration costs against our head-office which is in Australia, and substantial development costs against our Indian operations which haven’t been allocated across the group. Adjusted for these items, our original businesses would have recorded a profit.

Having said that, it’s true that the original businesses didn’t grow at the same pace we’ve seen in the past. A major reason was that the primary focus of management has been on identifying the areas of greatest opportunity for
profitable growth across the whole group. Given the revenues of the acquired businesses represent around 80 percent of group revenues, our major focus has been to secure and grow those revenues. We’re really pleased with the progress we’ve made, in only four months, in integrating those businesses and enhancing the confidence of iSOFT’s customers in us as the new owners of the
business.

Also in Malaysia where we signed up a lot of new business over the past two years we are now moving from the implementation phase for these hospitals to a maintenance mode, where we receive less by way of upfront revenues but
more secure and sustainable recurring revenues.

From November last year we became one group, trading as iSOFT, with merged businesses in each of our geographies so we’re not going to go back and notionally split the operations into old and new businesses. We will be
reporting as an integrated, merged group going forward.

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Your guidance regarding EBITDA for the current full year ending June 2008 is $85 million to $95 million, up from $31.7 million last year. This implies EBITDA in the current second half of about $60 million to $70 million. What assumptions underlie this forecast?

Executive Chairman & CEO Gary Cohen

We’re also forecasting revenues of $380 million to $400 million. This is the first time since the acquisition of iSOFT that we’ve provided this level of guidance. We’re prepared to do that because of the nature of the merged
group’s revenue, with over 80 percent of our 2008 revenues already contracted or expected (that is under contract discussion). This reflects the increased level of recurring income in our acquired businesses. The recurring revenue comes from long term contracts (as we have with the NHS and CSC) and maintenance contracts, as opposed to new one-off license fees which are less predictable.

Given our comfort in the revenue, we can extrapolate from our first-half EBITDA margin of 24 percent an expected level of EBITDA for the second half, and for 2008 overall. Our targeted revenues include assumptions
regarding new sales and the maintenance of existing margins.

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You’ve indicated that IBA has extracted annualised synergy benefits of $16 million to date from the iSOFT acquisition and that you’re on track to realise synergies of $27 million in the June 2009 year. What are the risks to realising the remaining synergies?

Executive Chairman & CEO Gary Cohen

We’re confident we’ll achieve the forecast. We’ve clearly identified the synergies, which consist of items like the removal of the iSOFT LSE listing, the old iSOFT board and duplication of premises.

Rather than risks in achieving our targets, we believe there’s scope for additional synergies to flow from opportunities such as combining our continental European operations. We don’t intend to stop searching for
additional efficiencies in the business.

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You’ve confirmed that the first release of LORENZO, the hospital software platform iSOFT has been developing for the UK National Health Service (NHS), is on track for release in June. What is the time line for later releases of LORENZO and what are the implications for cash flow?

Executive Chairman & CEO Gary Cohen

We’re happy with the progress we have made with LORENZO, and are working with CSC on implementation. We’re introducing changes to our agreements with CSC that will result in a closer working relationship to help ensure the success of the LORENZO roll-out under the NHS National
Programme for IT (NPfIT). These changes will also secure improved payment terms for us.

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IBA had net debt of $282.4 million as at the end of December, and net debt to net debt plus equity was 32.7 percent. IBA had net cash prior to the iSOFT acquisition. Can you comment on the funding needs of the business over the next 18 months?

Executive Chairman & CEO Gary Cohen

Overall the majority of our debt funding requirements are in place for around four years. We also anticipate improving cash flows in the second half as the ESA and contract financing unwinds.

The additional cash flows from the unwind of the ESA agreement will generate over $150 million in the next 24 months which will go a long way to reduce the ABN facility.

The other matter I would like to point out is that our finance arrangements are pretty conventional and we do not have market capitalisation clauses or similar which would give the banks the right to review the facility based on the share price or market capitalisation.

Furthermore we have reviewed our market disclosures based on the recent ASX announcement concerning margin loans and we are satisfied that there are no material matters of this kind.

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Do you intend to continue to grow the business by acquisition? What capacity do you have to do so?

Executive Chairman & CEO Gary Cohen

We can never rule out further acquisitions, but our core focus over the next 12 months is to maximise the benefits from the iSOFT acquisition.

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IBA’s acquisition of iSOFT was partly funded by Allco Equity Partners (AEP), which is now a 26.4 percent shareholder in IBA. Does AEP have any direct involvement in the management of the company? Also can you explain what the position is with the $39.7 million Convertible Note that they hold?

Executive Chairman & CEO Gary Cohen

AEP is a separately listed company to Allco Finance Group (AFG), which only holds less than 15 percent of the shares in AEP. AEP has a separate board and executive to that of AFG. AEP is cashed up ($140M). We are not aware that there is financial pressure on AEP as a result of what is happening at AFG.

AEP has two directors appointed to our board. They have no direct involvement in the management of IBA. The $39.7 million convertible loan is convertible to equity at the rate of 86 cents per IBA share. There are no special
ratchet provisions depending on the share price. It is non interest bearing (unless we pay dividends), it is subordinated to ABN and is not repayable before October 2012. The only other arrangement we have with AEP is a
short-term loan facility it has provided for $56 million which is also subordinated to the ABN debt.

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You’ve previously indicated IBA would be restricted in paying dividends in the current year. Can you provide any guidance on when shareholders might see a dividend?

Executive Chairman & CEO Gary Cohen

As we’ve said, we won’t be paying dividends in the June 2008 year, but we’re a dividend-paying company and the board will have that in mind as we go forward.

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In the Rights Issue and Scheme documents for the iSOFT acquisition you identified a number of risks that related to retaining and closing sales for forecast iSOFT opportunities. Over the last few weeks you have made a
number of announcements covering new contracts and renewals in the UK, Ireland and Australia. Is this an indication that you have been able to close out these risks?

Executive Chairman & CEO Gary Cohen

Yes it is. Since completing the acquisition in October 2007 we have been talking to all our clients and resolving issues that relate to client concerns about the future of iSOFT. The multi-million dollar renewal with the Irish Heath Service Executive and the closure of agreements that span 10 years with a consortium of six NHS trusts in the north-west of England along with the announcements last week of the preferred vendor status for state wide pharmacy and patient management systems in Tasmania are good examples of the key clients re-committing.

One of the strengths of the new company is our access to a strong recurring revenue base which is currently running at over 60 percent of revenues and an international network of over 13,000 clients. For example since January 2008 in the UK alone we have orders for renewals and upgrades from over 150 iSOFT clients valued at over $11.5 million. These are very healthy signs for the company’s future revenue growth.

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Thank you Gary.