Nanosonics sees growth, targets 8-12% revenue increase By Investing.com

Nanosonics Limited (NAN:ASX), a leader in infection prevention solutions, reported a robust turnaround in its 2024 full-year performance during the recent earnings call. The company experienced a significant second-half revenue increase of 14% to $90.4 million, attributing the growth to a 24% rise in capital unit sales and a 20% increase in capital revenue.

With a strong focus on expanding its trophon product line, especially in North America, and strategic investments in research and development, Nanosonics anticipates a revenue growth of 8% to 12% in the current financial year. The company also reported a solid financial position with $130 million in cash and cash equivalents and a profitable trophon business generating a $40.4 million profit before tax.

Key Takeaways

• Second-half revenue rose to $90.4 million, a 14% increase.
• Capital unit sales and capital revenue increased by 24% and 20%, respectively.
• Revenue growth of 8% to 12% is expected in the current financial year.
• North American market penetration for trophon product reached 50%.
• The company holds $130 million in cash and cash equivalents.
• Profit before tax for the trophon business stood at $40.4 million.
• A significant opportunity identified for upgrading 9,000 older trophon devices in North America.
• Revenue for the year was $170 million, a 2% year-over-year increase.
• Gross profit margin was at 77.9%.
• Operating expenses grew by 10%, with a projected 6-10% increase for FY ’25.
• Free cash flow was reported at $20.4 million.

Company Outlook

• Targeting an 8% to 12% revenue growth in the current financial year.
• Plans to focus on expanding product portfolio through potential mergers and acquisitions.
• Anticipates positive operating leverage and an increased operating margin for trophon business in FY ’25.
• Aims to increase new unit sales to 3,000 per annum globally.

Bearish Highlights

• Profit before tax for the year decreased by $8.6 million from the previous year, primarily due to hospital capital budget constraints.
• Operating expenses are projected to grow, albeit at a slower rate in FY ’25 compared to FY ’24.

Bullish Highlights

• Significant growth opportunity in North America for trophon product upgrades.
• Strong sales of consumables in the second half of the year, driven by increased ultrasound procedural volumes.
• Service contracts becoming a significant contributor to revenue and cash flow.

Misses

• Only 620 trophon device upgrades were sold in the first half of the year due to hospital budget constraints, although the second half saw a 71% increase in upgrade sales in North America.

Q&A Highlights

• CEO Michael Kavanagh stated that FDA questions regarding the CORIS device are normal and will not affect the approval timeline.
• Kavanagh expressed confidence in growth potential in Europe, particularly in the UK and with Ecolab (NYSE:).
• Optimism about progress in Japan and China markets, despite no specific revenue projections provided.

Nanosonics’ strategic focus on R&D has led to the development of the CORIS product, which aims to meet the critical need for cleaning flexible endoscopes. With over 60 million endoscope procedures conducted annually, the company sees a significant market opportunity. The FDA De Novo regulatory submission for CORIS is a critical milestone, and the company is actively working with the FDA to address inquiries.

The company is also implementing a new ERP system, with an investment of $1 million expected to be completed in FY ’25. This investment is projected to support the company’s growth and operational efficiency.

Nanosonics’ comprehensive strategy for growth, focusing on product upgrades, market expansion, and innovation, positions it favorably for the upcoming financial year. The company’s strong financial foundation and clear strategic direction have set the stage for continued success in the infection prevention market.

Full transcript – Nanosonics Ltd (NAN) Q4 2024:

Operator: Thank you for standing by, and welcome to the Nanosonics Limited 2024 Full Year Results Call. (Operator Instructions). I would now like to hand the conference over to Mr. Michael Kavanagh, Managing Director and CEO. Please go ahead.

Michael Kavanagh: Thank you very much, and a very good morning, everybody, and thank you all for joining this morning. I understand how busy everybody is this time of the year. I’m joined today by Jason Burriss, our CFO, who you will hear from shortly to take you through the details of the financial results for the year. Before that, I think while the impact of the hospital capital budget restrictions, on our capital sales in the first half are well understood. A central theme for the full year results, I think, is the turnaround in performance in the second half over the first half. We saw our second half revenue of $90.4 million, up 14% on the first half. The course then deduct part was driven by our total capital unit sales were actually up 24% in the second half over the first with capital revenue up 20%. While the hospital budget constraints, they remain, the requirements for infection prevention has not changed. Together with the underlying positive fundamentals for infection prevention and importantly, a growing pipeline, we’re pretty confident that the return to a growth profile that you saw in the second half will continue into this current financial year, as indicated in our business outlook, where we’re targeting revenue growth to be in the range of 8% to 12%. This growth will come from ongoing I believe, growth in capital units together with growth in our high-margin recurring revenue. I’ll come back to details of our outlook a bit later. As usual, we have provided a lot of granular detail, especially in the investor presentation, which you can find online. However, there are a number of key important takeaways or insights. I’d like to draw out from all the detail. The first one really is that the growth opportunity for trophon remains significant across all regions. There are really two aspects to this. First of all, we’ve successfully positioned trophon as the standard of care in several major markets already. Although the adoption fundamental vary by region based on where they are today in terms of their guidelines, we do anticipate that the global demand for automated high-level disinfection of ultrasound transducers will actually grow. In that context, trophon does stand out as the most advanced and proven solution available to meet this need. The second aspect to this growth opportunity is in North America, which is our largest market. Trophon has reached a significant milestone by reaching 50% penetration of the estimated 60,000 unit TAM. We certainly have strategies in place to access the remaining 50% and that will come through ongoing penetration into the many relevant departments in each hospital that use ultrasound, which are many, as well as accessing the private physician office market through a number of specialized channel partners that we have established. The second takeaway, I would say, is that beyond our investments in the longer growth agenda for the business, the trophon business alone is highly profitable. The trophon business itself excluding the non-trophon costs, delivered profit before tax of $40.4 million in FY ’24 or 24% of sales. You’ll find a P&L of the trophon only business in the investor presentation. As I mentioned, that this P&L excludes all investments outside of trophon such as CORIS and non-trophy R&D, but it does include some one-offs such as our investments in the new ERP system, where we did invest approximately $1 million in the last 12 months. Those costs, albeit one-off are allocated to the trophon business. Looking ahead, we do expect further positive leverage, operating leverage coming through in that trophon business. Of course, Nanosonics is not just about trophon. Is about inflection provision and instrument processing and CORIS representing our next transformational technology, it does represent a significant opportunity. We are confident in our ability to establish a new standard of care in the important cleaning phase of endoscopy reprocessing really because of the criticality of the problem and that CORIS is designed to solve. And I wanted to recognize that the key milestone reached at the end of April with the filing of the FDA to Novo regulatory submission for CORIS. Final takeaway, I guess, is that the company does generate strong free cash flow and has $130 million in cash and cash equivalents to support ongoing investments in our long-term growth agenda. We will continue to invest in R&D, although at a lower percentage of revenue moving forward but as part of our product expansion strategy, we do remain open to opportunities with industry partners and potential acquisitions as part of our product expansion strategy, of course, that would align with our goal of transforming medical device reprocessing. Moving on to some of the details in the results, and then I’ll hand over to Jason. But first of all, on installed base, you will have seen that the global installed base increased by 2,340 units in the year. That’s an increase of 7% in the last 12 months, where there’s now just under 35,000 trophon units in operation around the world. Importantly, that equates to about $27 million patients being protected against the risk of cross-contamination on an annual basis with the trophon technology. In North America, the total installed base grew by 2,000 units. That was up 7%, where as I mentioned, we’re at about 50% of the TAM, so over 30,400 odd units in operation in North America. Importantly, there’s over 270,000 ultrasound devices in operation in the United States alone. The growth opportunity still remains significant for Trophon. In terms of how we see the opportunity, it can roughly be split 2/3 in the hospital market. This is the remaining 30,000, 2/3 in the hospital market and 1/3 in the private physician market. We have strategies in place to access the opportunity in both segments. For the hospital markets where our direct team are focused, there are approximately 5,700 hospitals that use ultrasound in the United States. Trophon is now operating in at least one department of those in a significant percentage of these hospitals. In addition to accessing the hospitals that have not yet adopted automation in trophon, there’s also a significant opportunity to access the many departments within hospitals that use ultrasound, but have not yet adopted trophon. In many cases, that’s due to lack of awareness. Today, approximately 60%, 65% of our new installed base sales are into existing hospitals. In other words, going deep into all those departments within hospitals that use ultrasound and there are many departments. About 20% of our sales today on average would be into new hospitals. The other important segment is the private physician market, making up about 1/3 or about 10,000 unit opportunity. We have partnered with a number of channel partners who specialize in this segment, supported by our direct team and today, approximately 15% of our new IB sales are into this segment. We expect our penetration into that segment of the market will continue to grow. In our European operation or the EMEA operation, the total installed base for the year grew 11% in the last 12 months. That’s now there’s 2,230 old units in operation in the region. A new installed base for the year was up 16%. As in North America, the new IB growth was stronger in the second half over the first. It was actually up 75% in the second half over the first half. We do continue to invest in our growth plans for the regions, and we certainly believe that the fundamentals will continue to strengthen over there. In France, Nanosonics, we’ve recently established a partnership with Ecolab, we’re a very large global infection prevention company as our distributor for the market in France. This new collaboration has led to trophon being successfully lifted in the, an independent disinfection device category on the UGAP public hospital tender, which is the largest public hospital tender in France. That’s important because in the past, when we were distributing through GE Healthcare, trophon was considered an accessory to ultrasound. Being listed in an independent category now with Ecolab on UGAP opens the market more up for us in the French market. We’ve also signed distribution agreements with Ecolab, where they’re interested based on their infrastructures in Turkey and some of the markets in the Middle East. In the U.K. and Ireland, we’ve actually taken our partnership with Ecolab a little bit further in that we’re now taking on the distribution through our direct infrastructure of one of their products called the Soluscope TEE or that is a disinfection solution for the cardiac ultrasound or transesophageal echocardiography ultrasound. That then diversifies our product offerings to encompass all ultra sound modalities now to include cardiology. This expansion is not only strengthens our position in those markets as a leader for overall ultrasound reprocessing but it also enhances our ability to meet the diverse needs, obviously, of our customers. In the Asia Pacific region, the installed base increased 6% or 120 units, so there’s now 2,170 units in operation. This growth continues. It’s primarily in the ANZ region and certainly, that increase in new IB consolidates our market-leading position in Australia and New Zealand. We do continue to invest in our expansion plans in the Asia Pacific region with primary focus on Japan, while progressing our regulatory strategy in China. In Japan, progress is being made on the development now of national-based guidelines. A multicenter study during the year, examining the degree to of contamination of ultrasound probes in emergency departments was conducted across a number of major teaching hospitals. Over 75% of the probe tests in those emergency departments were found to be contaminated. This new study, together with the one that we have conducted in the OB/GYN setting, which demonstrated over 90% were contaminated further supports the awareness of the risks. I recently, in July, attendance the National Japanese Society of Infection Prevention. During a symposium on the topic on the risk of cross-contamination from ultrasound, where the results from both these studies were actually presented, a survey was conducted amongst the approximate 400 infection prevention participants in the symposium. The results of that survey indicated that over 90% of participants now recognize the risk of cross-contamination associated with ultrasound transducers and over 80% green, that the Spalding classification, which is a classification used in markets like the United States and Australia and the U.K., etc., for high-level disinfection should be implemented. We’re certainly making great progress now in levels of awareness and acceptance of the risk, and then this translates into our work towards the development of national base guidelines from these societies. Moving quickly on to upgrades, and point, I mean, is that upgrades represent a significant opportunity for both customers as well as the company. In particularly, in North America, where the absolute majority of the older EPR trophon EPR devices are still in use. Natural fact is about 9,000 device opportunity in the market for upgrade devices that are aged over 7 years or above. For customers, the latest trophon to bring significant benefits in terms of usability, traceability and digitization, along, of course, with the proven efficacy of the technology but for the company, in addition to capital revenue, there’s also significant incremental service revenue opportunity. The reason why this is incremental is purely since going direct, all upgrades are now sold through our North American direct operation, whereas in the past, these older EPR units were originally sold by GE Healthcare, where they also sold the service contracts. There’s a great opportunity not just in capital revenue increase, but also in increases in our recurring annuity revenue from service contracts. Approximately between 50% to 60% of units do take out a service contract, in many cases, multiyear service contracts, which you will see on our balance sheet and is a big driver to our cash flow indeed. In the last year, there were just over 1,500 upgrades sold globally. Sales of upgrades in the first half were particularly impacted due to hospital budget constraints where the customers extended the use of their older devices. This resulted in only 620 units being sold in the first half. Just in the significant turnaround was experienced in the second half with upgrade unit sales up 44%, but very specifically in North America where the majority of the opportunity is, the upgrade sales in the second half were up 71% to 820 units, which is the largest half to date in upgrade sales in North America. In both, it is worth acknowledging that in both APAC and AMEA, the upgrade opportunity is actually a lot less now. One, due to the lower installed base of those aged devices, but also the success that we’ve had in the last number of years in upgrading those older devices. Really, the primary opportunity for upgrades moving forward is in North America, and we’ve got the strategies in place to continue to drive that growth. Moving quickly over on to R&D. During the year, we invested just under $33 million in R&D, and that was up 11% for the year. In addition to our endoscopy reprocessing program with CORIS, the R&D organization also progressed a number of important projects in our ultrasound reprocessing and connectivity product road maps to future offerings and leadership in this sector. On the CORIS front, it did reach a critical milestone at the end of April, as people are aware, with the FDA De Novo regulatory submission being filed. That does represent a very significant step towards, I believe, addressing one of the most critical unmet needs today in instrument reprocessing and that is the cleaning of flexible endoscopes. We recently received a round of questions from the FDA, and we’re currently now working through to answer these questions with the FDA. While we go through the regulatory approval process, however, we do continue to advance our clinical and awareness program with CORIS, where the product and the data we use is now been presented at numerous international clinical conferences. As recently announced, you would have seen a new study demonstrates is how the CORIS technology significantly outperforms in manual cleaning, especially in biofilm removal in endoscopes. And that was published, as I say, recently, the Journal of hospital infection. We certainly believe CORIS represents a significant opportunity for the business as well as customers and patients. There are over 60 million flexible endoscope procedures conducted per annum, that’s just across the major Western markets, and this number is projected to grow at approximately 6% per annum. Contaminated endoscopes are known potential source of infection. Adverse events continue to grow as evidenced by the FDA more database that comes out on a quarterly basis. That’s over 8,500 adverse advents just in the last quarter. We believe CORIS can play an important part in addressing current problems, certainly by bringing a new level of efficacy in cleaning outcomes in all channels of endoscopes, which is a critical step for effective disinfection. Before I hand over to Jason, I’d also just like to announce the appointment of our new CTO, Derek Minihane, who will commence with the organization on the 23rd of September. Derek has highly experienced global executive with over a 30-year career spanning health care, semiconductors and professional services. He held various leadership roles at Cochlear for almost 14 years, where he led global teams in the R&D organization there that delivered multiple generations of sound processors, connected health initiatives and as well as leading some of the longer-term research projects as well as collaborations with industry and clinical partners. Prior to Cochlear Derek worked in various leadership roles for companies in Silicon Valley. And most recently, he’s been a partner at Deloitte focusing on helping clients commercialize their IP and technology. We look forward to Derek joining on the 23rd of September. I’ll now hand over to Jason to give a brief overview of some of the key financials.

Jason Burriss: Thanks, Michael, and good morning, everyone. Firstly, to revenue. As Michael mentioned, the business revenue profile for fiscal year ’24 had two distinct halves. In the first half, revenue was negatively impacted by lower capital unit sales as discussed due to hospital budget constraints. However, the second half saw a significant turnaround with a 14% growth in revenue compared to the first half, which got us to overall positive growth for the year. Specifically, the second half revenue of $90.4 million was up 14% over the first half, resulting in overall revenue for the year of $170 million, up 2%. Capital revenue for the year was $48.2 million was down $6 million or 11% due to lower total capital unit sales with a total of 3,850 units sold versus the prior year of around 4,400. Again, the second half saw significant improvements with 2,330 units sold in the second half compared to 1,720 units in the first. This was a 610 unit increase or 24% growth half two over the first half. This resulted in second half capital revenue of $26.3 million, a 20% increase over the first half. Pricing, importantly, for our capital units remained steady on the previous year. You’ll remember from our call on the first half that we, the company introduced several bridges to budget sales offerings in North America. The majority of units sold during the second half were actually through the traditional capital purchase models. We’ll continue to offer these sales options in ‘25 to support our customers, but we continue to expect that the majority of sales will remain under the traditional capital purchase model. To consumables and service, a good result, up 9% for the year to $121.8 million versus the prior corresponding period and up 11% in the second half versus the first. This was driven by a combination of higher installed base, which grew 7% for the year as well as growth in ultrasound procedures in the second half of fiscal year ’24 and continued growth in service contracts. Again, pricing remained relatively stable for consumables during the year. Switching to the regions. Total revenue in North America was $154.2 million, up 3% with consumables and service revenue up 8%, but with capital revenue down 8% for the reasons already discussed. Again, the second half improved significantly with total revenue of $81.9 million, up 13% over the first half and capital revenue up 21% in consumables and service revenue up 10%. In the EMEA region, just like North America, the market environment remains challenging, both on costs and staffing pressures in hospitals but I’m pleased to say that total revenue was up 24% to $10.1 million. As you are aware, the U.K. is our largest market in the EMEA region and the majority of the units placed in the U.K. are under the managed equipment service model. In this model, no capital revenue is recognized for placements, which is offset by higher consumables pricing. Despite new installed base increasing 16% for the year in the region, overall capital revenue was down 7% as a significant percentage of these new units were under the MES offering. However, consumables and server versus revenue was up 33%. In the Asia-Pac region, which we remember, operate as a distributor, particularly in (indiscernible), the installed base increased by 6% to 2,170 units, adding 120 new units during the year. As Michael mentioned earlier, upgrades were down 41% in the year falling from 220 units in ’23 fiscal year ’23 to 130 units in fiscal year ’24. This is really around the high penetration of the older devices already being upgraded. Consumables and service revenue was up 2% in the year to $4.3 million and the decrease in capital revenue led to an overall revenue drop of 23%, bringing it down to $5.9 million. Moving now to gross profit margin. Margin for the year was 77.9%, down 0.8 points versus the prior corresponding period. Important to note in the second half, margin was 76.3% versus the first half of 79.7%. As you’ll remember, we flagged that we were going to do a one-off slowdown in manufacturing in the second half of fiscal year ’24 to lower the working capital that we have in our inventory levels. We were successful in doing that, which was a large driver of cash flows in the second half. And importantly, we returned the inventory to the desired levels. We now expect to return to higher levels of manufacturing in fiscal year ’25, which will result in improvements in the gross margin and head back towards the levels we experienced in 2024. Michael will spread, sorry, he will share in a minute our guidance specifically around our margin for ’25. Operating expenses for the year were $125.6 million, up 10% on the prior corresponding period. Consistent with our outlook that we shared at the first half, where we indicated a lowering in the operating expense growth from the original 17% to 22% guidance, which we issued earlier in the year. Breaking our operating expenses down. 38% goes towards sales growth in established markets that generate the majority of our high revenue today. 60% of our OpEx goes into investments in developing new markets for future growth. 26% of our OpEx goes into R&D, covering both endoscope reprocessing and ultrasound reprocessing. As Michael mentioned, the organization will continue to invest in R&D. However, we do expect that R&D as a percentage of revenue will start to reduce. Finally, 30% of our investments go into our infrastructure across our operations, manufacturing and our digital capabilities. As previously mentioned, the organization is implementing a new ERP system and $1 million was invested in this in fiscal year ’24, and that project is expected to complete in fiscal year ’25. Our expectations are that operating expenses will grow slower in fiscal year ’25 than they did in fiscal year ’24. On to operating profit and cash. Profit before tax for the year was $13 million, down $8.6 million from fiscal year ’23. This decrease takes into account the impact of hospital capital budget constraints on overall capital sales, in particular, in the first half, as well, of course, is our ongoing investments in a long-term strategic growth agenda. Free cash flow for the year was $20.4 million. This was driven by an increase in service contracts with many customers paying upfront for multiyear service as well as reducing our inventory that I talked about earlier on. This, of course, we did without impacting our customer delivery times. Cash and cash equivalents were $129.6 million at 30 June 2024 and the company has no debt. Just before I hand back to Michael, I’d like to just touch on the trophon only business. The Trophon business alone continues to generate strong profitability and higher returns. For fiscal year ’24, the profit before tax was $40.4 million, which is approximately 24% of sales. OpEx in the trophon business includes investments in emerging markets that are currently not contributing significantly to revenue today but have the potential to do so in the future. Additionally, the company continued investments in R&D on its ultrasound reprocessing technology road. Importantly, looking ahead, we expect revenue in the trophon business to grow faster than OpEx in fiscal year ’25. With that, I’ll hand back to Michael.

Michael Kavanagh: Thanks, Jason. Finally, our outlook for the FY ’25. First of all, I do have to recognize that the challenges associated with the impacts of inflation on hospital budgets remain. However, on the back of a strong second half in FY ’24, together with a growing pipeline for FY ’25, we’re targeting from a total revenue perspective, growth of between 8% and 12%. That growth is expected to come from growing capital revenue with increased unit volumes, both in new installed base as well as upgrades. Of course, the increasing recurring revenue aligned with the growth in installed base and upgrade sales, both on consumables and service. For our gross margin, as Jason pointed out, the second half gross margin was down to 76.3%, and that was really primarily associated with the one-off slowdown in manufacturing but with the expectations now in terms of our capital unit growth into the second half, and we are expecting higher production volumes, our expected gross margin for FY ’25 is between (77% to 79%). Our operating expenses, again, as Jason mentioned, we expect the operating expenses to grow lower than what they were in FY ’24. And so those operating expenses are projected to grow between 6% to 10%. That includes ongoing investments in the CORIS readiness of commercialization and other R&D as well as the one-off expenses associated with the introduction of the new ERP system, where there are further expenses to be incurred this year, but we expect to conclude that program this year. For the trophon only business, we’re expecting positive operating leverage and increases in operating margin as well in FY ’25. With that, I will now hand over for any questions.

Operator: (Operator Instructions) Your first question comes from Lyanne Harrison from Bank of America.

Lyanne Harrison: Yes. Michael and Jason. Can I start with hospital budgets? Obviously, you’ve got very good unit sales in the second half. Can you comment on what you’re seeing there in terms of hospital budgets and whether or not those have eased?

Michael Kavanagh: Thanks, Lyanne. I spent 4 weeks in the U.S. in July and went to many cities visited many hospitals. Some are feeling it more than others. It wasn’t a major topic of discussion when I was there but I think we still have to be cautious that some of these constraints still do exist. What we, I certainly came away feeling very confident in the team and the strategies that the team have put in place for FY ’25 in North America, but also after visiting a lot of hospitals, I felt pretty confident in being able to provide the guidance that we did this morning. But I can’t really comment on a national basis. The constraints are there, seem to have eased a little bit, but we feel pretty comfortable just based on the requirements for infection prevention, our current pipeline, etc., that we should be able to grow the capital that we’ve projected.

Lyanne Harrison: Okay. Can we say where we are in the pipeline for currently versus 6 months ago, has that pipeline grown for both new units as well as upgrades?

Michael Kavanagh: Yes. The pipeline, we look at it on a monthly basis, and it’s tracking well in accordance with our projections to be able to feed the unit sales requirements. Some months, you could have great sales, which will leave your pipeline a bit lower and then the next month, so it moves on a month-to-month basis, but we’re pretty confident in terms of our pipeline growth and identification of opportunities.

Lyanne Harrison: Okay. Can you confirm, have you had any, I guess, opportunities that were lost from the pipeline?

Michael Kavanagh: I mean in North America, I would say, not really certainly not a competition in North America. The — if we’ve got something in the pipeline that’s really aged, our policy really will be to take it off the pipeline and start again but in terms of losing pipeline, no, not really.

Lyanne Harrison: Okay. Sorry, one more question on pipeline, and then I’ll leave it there, but the time of converting some of these sales opportunities. Obviously, when we spoke the last time, it was taking a little bit longer because of those hospital budgetary constraints. Is that time to convert improving or reducing?

Michael Kavanagh: One of the big drivers for the performance in the second half as well was the time line to convert improve for both new installed base as well as upgrades. What we’re seeing is we’re maintaining those time lines to convert now into the start of this year. They’re certainly not getting worse and we’d like to think as we progress through the year, it could improve further but at the moment, the benefits in those time lines that we got in the second half, they’re carrying forward into this year so far.

Operator: Your next question comes from Josh Kannourakis from Barrenjoey.

Josh Kannourakis: First question, just around a bit more detail around guidance to FY ’25. Can you give us a bit more context around how we should be perhaps thinking about the momentum in installed base? Maybe if you could, Michael, across sort of North America but also globally, I guess, in context of your previous comments on similar activity in the second half.

Michael Kavanagh: Yes. I think we, I mean, we certainly expect the installed base to grow more than what we saw in FY ’24. From a North America perspective, I think if you look over the last couple of 2 years or so, we were somewhere between, well, this last year, 22,000 in the prior year might have been 23,000. Sorry, I don’t have it on front of me. I think it will be in the low 2,000s in North America, but we’d like to see that offset by growth in the other regions. I think our goal is to get closer to sort of a 3,000 new IB over the coming years where the other regions are contributing more and, but obviously, North America continuing to contribute around that 2,000 mark moving forward.

Josh Kannourakis: Right, that’s very helpful. Also, thanks for some of the extra granularities around the trophon only business. I guess when we look at that and you’re expecting continued improvement in margins and the revenue growth you’ve obviously given I think if you back that out, you can sort of work out what broadly is getting spent across CORIS in ’24 and keen to know how we should be thinking about, I guess, the mix of those in terms of if there’s any sort of broad brush you can give us in terms of the OpEx growth across both the (indiscernible) business versus the CORIS business and any sort of growth is to the upside or downside that we should be thinking about in terms of timing, of course, or things that could impact that?

Michael Kavanagh: Yes. I think the, I mean you can look at the numbers and the P&L from the trophon only business and looked at non-trophon OpEx was in the last 12 months was in the order of about $27 million or so. A vast percentage of that will certainly have been associated with CORIS, not just only in R&D but in the readiness from commercialization with manufacturing and all of those sort of things. We will, as you can imagine, we will anticipate the further investments in CORIS moving forward, especially on the commercialization side. On the overall OpEx growth in the trophon business, probably in the order of about 5% to 7% growth in that in FY ’25. Expectations for operating leverage. Overall, for the business, what we would like to think is that the revenue profile overall will grow faster than the total OpEx. That includes the OpEx associated with CORIS, which obviously is not going to contribute to revenue in FY ’25.

Josh Kannourakis: Okay. That’s great. Just a final one, obviously, the growing cash balance and you clearly earning interest income from that. You did talk a little bit more around M&A and a focus there. Can you maybe just give us a little bit of an update on how you’re sort of thinking about that more broadly, the framework you’re sort of looking at in terms of assessing opportunities and whether or not that’s more or less of a feature coming into this year and next.

Michael Kavanagh: Yes. Well, it is going to become more of a feature at least a bit of focus for the business as we look to continue to expand our product portfolio. We have hired a dedicated resource based out of Europe because a lot of the things we see actually are European-based as potentials. We’ve put a dedicated resource. That doesn’t mean we’ll identify something shortly, but at least we got somebody dedicated looking at this part of the business. When it comes to the areas that we’re focusing on, it is very much in the areas of instrument reprocessing. We think that moving forward, the opportunities, especially after we’ve launched CORIS could be a lot greater in that area for us as well because if you take the end-to-end process of reprocessing an endoscope, there are many, many different steps and many consumables and products used along that continuum of reprocessing. I can imagine on the endoscopy side of things, that there could be, we are certainly would be more opportunities over and above the ultrasound sort of things. We are very much open to looking outside of ultrasound reprocessing and endoscope reprocessing, but still in the overall instrument processing space, which is where our knowledge base is.

Operator: Your next question comes from David Low from JPMorgan.

David Low: Can we just start with the FDA’s questions on the CORIS device. I mean, was that expected? Is there anything to read into the fact that you’ve had questions from them any implication on total?

Michael Kavanagh: No, no. I don’t think there won’t be ever a submission to the FDA that doesn’t have questions.

David Low: So, the questions that you’ve received are not out of the ordinary and won’t affect the timetable in any…

Michael Kavanagh: No, we were saying De Nova can take up to 12 months. The types of questions. Obviously, you’ve got many different reviewers, many different parts of the application. They can all come back with questions which are far ranged from many different aspects across the technology, but nothing necessarily out of the ordinary or our own expectations of what we could have anticipated.

David Low: Okay. Perfect. The other question I had was just the consumable sales were much stronger in the second half. And I heard the commentary about U.K. and the MES. But just looking at the U.S. alone, it was up strongly. Just wondering if there’s an explanation for that strong run rate. I presume its rates of ultrasound in the health systems. Will it continue, I guess, is it a good base for forecasting, please?

Michael Kavanagh: Yes. We did see some tailwinds, say that on ultrasound procedural volumes. I think at the half year, when we came out in February, we said we were experiencing that. We do — we’ve now seen that continue. I think ultra sound procedural volumes — I think we could probably, we would like to think that we can’t influence the growth there. Obviously, in ultra-volumes, but we probably think that they’re at a space now where they’ll continue. It will be really correlated with new installed base growth, but also correlated with upgrades and service because service can be quite — is becoming quite significant. With the service, approximately 50%, 60% of units that we sell will take out a service contract. Now we only start to recognizing — the machine comes with a one-year warranty, and then we only start recognizing revenue on the service after a year. Even though some customers will buy multiyear service contracts, but we only recognize the amount that they will have spent in that year. You’ll see that actually in the balance sheet on contract liabilities. Actually, the fact it wasn’t insignificant contributor to our overall cash flow as well, the contract liabilities associated with service contracts.

David Low: Perfect. Last one I’ve got. I mean, you mentioned a minute ago about hoping to push new unit sales up to the 3,000 level per annum and globally, yes. They’re in like the question. I think the U.S., we understand it’s probably moving towards being mature. Are you seeing a regulatory push that could drive a significant uplift in sales in other regions?

Michael Kavanagh: Look, not over nice, but we’re pretty confident, I mentioned in the commentary on Japan, and it will still take a bit of time. We feel a bit more confident now moving forward with some further growth in Europe this year, both in the U.K. and on the back of what we’re doing with Ecolab. The 3,000 won’t come this year, but over the coming two years to three years, I would certainly like to think that we’re getting to those sort of run rates.

Operator: Your final question comes from Craig Wong-Pan from RBC.

Craig Wong-Pan: Just on North America, the service revenues are quite strong in the second half, by my calculation, $11.5 million. Just wondered, is that a half number a base level amount that we could assume going forward in North America?

Michael Kavanagh: Yes. We’d like to think we get growth on top of that, especially as upgrades come through. Yes, we expect that the service revenue for the business will continue to grow quite strongly.

Craig Wong-Pan: There’s no seasonality in that where that might drop in the first half?

Michael Kavanagh: No, no. When you look at service revenue, and again, if you look at the revenue and then also have a look at the contract liabilities in the balance sheet, a lot of the contracts where that will come into the P&L as revenue in FY ’25, many of them are already in place.

Craig Wong-Pan: Okay, and then just on CORIS with those questions, has that caused any delay in the timing for when you think it could be approved?

Michael Kavanagh: No, we’re still sticking to the — within the sort of 12 months for initial FDA approval. We’re working diligently through answering those questions for the FDA, which is just the normal process of these regulatory submissions.

Craig Wong-Pan: And then on Japan and China, you made some sort of positive comments about some progress made there. If you were to have a guess, I mean, when do you think there could be a good revenue numbers printed in any of those markets coming through?

Michael Kavanagh: To be honest, I’ve been around a little bit too long now with Japan market, not just here in Nanosonics, but in previous employment as well. I’d hate to give a guess and certain expectation, but we’re certainly, I think good progress has been made, and we’d like to think that the Japan market will start adopting guidelines and requirements aligned to a lot of the more advanced countries around the world.

Craig Wong-Pan: Okay, and then just my last question on the ERP expenditure, for ’26, how much are you planning to spend there?

Michael Kavanagh: For ’25. Yes, it will be a little bit more than in ’24, but then that will be it. Okay. With that, thank you all for joining this morning and I’m sure Jason and I will be speaking to many of you over the coming weeks. Thank you again. Bye-bye.

Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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