Hi all, here's my notes from the call - hopefully fairly accurate but it's always tough to keep up.
Opening comments from Michael Kavanagh
“This is an important positive milestone, taking a further direct approach to the expansion of our sales team”
It is important to remember that Trophon in US was originally an exclusive agreement with GE. Nanosonics later established a direct-team, changed to non-exclusive arrangement to GE. This then moved to a capital reseller agreement agreement with NAN doing the consumables
Current Nanosonics US team is 80-85 and will increase to 100 across sales, service, clinical, marketing, logistics. Key result is that the team will be closer to the Trophon customer
Current agreement with GE expires in June 2022. Currently in discussions to enter a possible new agreement in July, so GE will have the ongoing ability to provide Trophon.
Revised sales model is “mutually beneficial” and will transition to that from today and will likely form the basis of a new agreement “if this goes ahead from July”.
The new model is similar to what they have with other ultrasound OEM’s. For all new Trophons they sell, Nanosonics will ship, train and install, and the customer becomes a NAN customer for the ongoing provision of consumables.
Ongoing provision of consumables for existing customers, GE and NAN will work “closely together” to transition those customers across.
Key benefit of all of this is that every Trophon customer in US will now be a NAN customer. Greater percentage of the sales that are made will now go through direct channel which increases the margin benefits per unit for Nanosonics. This will further drive the upgrade opportunity, they saw very good growth in this in the first half.
No negative impact on sales of consumables. Important to remember that in US in FY21 was 76% of total revenue and was 80% for GE (none of this changes when the ‘channel’ is changed)
Expansion of direct operation will be in place by end of Q4. Increase of opex in H2 of $1m or so. Some of this will come in sooner. $4m annually increase in opex but believe it will be more than offset by the increased margin and revenue.
One-off impact on revenue of $13-16m, this is due to GE no longer being required to hold inventory, so they won’t be replenishing their stockholding.
“We’ve had a great first half with upgrades in the H1, up over 100% on pcp, and we’re anticipating some of that growth will be deferred in H2 due to the change in sales model. Ultimately this is positive for NAN as those sales will likely go through the direct team which improves the margin”.$60.6m up 41% on pcp. A great result considering the changing market conditions, that demonstrates the resilience of the business in the context of the market conditions, which are improving. Full details on sales and results will be announced on February 22.
“This continues our evolution to a direct sales model which sets us up for success not only in Trophon but also for Coris.”
Analyst Q&A Josh Kannourakis from Barranjoey JK: Who will still be selling the Trophon and what are the incentive structures on a go-forward basis now? GE were getting 5% clip the ticket on the consumables, so that will now come to Nanosonics direct, what is the timing on this? MK: (Repeated some of his earlier points as Josh joined the call a bit late). GE would continue to sell through their ultrasound sales force, they will still get margin on capital and be incentivized to do so. Moving forward, a greater percentage of the portion of the new installed base and the upgrades. What is important is that owning all of the customers gives NAN the opportunity to drive upgrades directly.
Chris Cooper, Goldman Sachs CC: This all seems quite abrupt: big change in your key market, a ten year relationship it’s effective today, the TAM was upgraded in August – what has driven this change all of a sudden? (he sounded quite p*ssed off). MK: The agreement that we currently have is due to expire in 4 months’ time. We would naturally be in discussions now with GE to discuss what happens at this point. It’s no more complicated or simple as that. This is something we would normally be doing at this time of the year. CC: GE are going to be selling Trophon, they will still be incentivized by capital sales? MK: We are moving to pass-through model. They will sell to the customer at price A, they will invoice at price A, then they will invoice us at price B. The margin is the delta between A & B. Which is effectively exactly the same as today. The only difference is they won’t be holding any inventory. They will no longer be dealing with the consumables. No change to their capital sales incentive. Of course we still have to sign the agreement, I’m pretty confident we can come to appropriate terms, the have been selling this for 10 years. CC: The revenue impact you’re describing is purely a second-half impact, what is the degree of confidence there. 2H last year saw a big re-stocking improvement, you’re confident this won’t go through till FY23? MK: Correct.
Lyanne Harrison, Bank of America LH: GE doesn’t make any difference in terms of margin when they sell, as opposed to going forward. Are they then only trying to target new customers? MK: I imagine most of their efforts will be new installed base, rather than upgrades. The ultrasound team’s main incentive is to sell ultrasound rather than going after upgrades. So I assume the majority of their sales from FY23 will be capital sales. The benefit for Nanosonics is that we have direct access to those customers where we can drive the upgrade opportunity. LH: Does that prevent customers placing their upgrade order through GE? MK: No, customer always has choice. But it will be NAN in their supporting, installing, providing the service. But GE not prohibited from selling upgrades, we welcome that. Customers are not limited in their channel choice. LH: what proportion of US hardware sales is through GE? MK: Of our sales to GE, 80% was consumables and 20% capital which gives and indication. We’ve never split out in terms of who sells what because our model is a demand-generation strategy. LH: you disclosed revenue for H1, slightly below our expectations. Can you give a guide of sales and momentum in US? MK: we’ve had a strong half in US, without a doubt access has improved, then omicron hit, then case numbers increased, but I believe the result we’ve posted of $60.6m which I think was ahead of market consensus out there. We’re weathering that storm to a certain degree. January is looking quite positive in US in terms of new installed base. There are states at different stages with cases, vaccinations, and so on. The number we’ve posted this morning demonstrates things are not going too badly at all.
Shane Storey, Wilsons SS: Back to the price-A minus price-B model. Am I right in thinking that price-B is still a matter under negotiation with the new agreement? MK: that’s between Nanosonics and GE, the best assumption is that the pricing per-se is not going to change that much. SS: NAN will get a revenue and margin uplift, yet GE still are making their margin, what am I missing here? MK: the margin will come because the increased proportion of the new capital sales will come through the direct channel, i.e. we believe a greater number of upgrades will come to NAN, whereas 60-70% of upgrades used to come through GE.
John Copley, Evans & Partners JC: can you let us know the total proportion of installed base would have be installed by GE? MK: yes but remember they had an exclusive number for a number of years before we went direct. Of the 24,000 out there, probably 60% but I’ll have to look at that figure. JC: how many customers do you think that would be? MK: there are many accounts already where a hospital had purchased Trophon from GE and Nanosonics (because different departments buy from different sources), off the top of my head there will be a few thousand. JC: all logistics will need to take on responsibility for shipping etc MK: the ‘pass through’ which is what we’re desirous of, if GE sold a Trophon coupled with an ultrasound and Trophon, we will now ship and sell the Trophon, and train them. We can then assess and do one of our site assessments, and that one device can become a multiple. We see the benefits here.
Matthew Chevrier, Citigroup MC: Is GE a distributor in international markets, and what is the impact on gross margin? MK: Gross margin over time will increase. We do have some international relationships overseas. MC: GE planning on splitting healthcare and other businesses, has this had any impact? MK: they made that announcement back in November, they’re going through organizational change, I can’t speak to that or what their broader plans are as a business. Is the spin-off a driver of this? I would say not, this is Nanosonics saying “what is the roadmap, what does it look like from here?”.
David Low, JP Morgan DL: does GE as a distributor different from anyone else after this change MK: good question, in US we have relationships with other ultrasound manufacturers and what this does is align them with other ultrasound manufacturers, so this is what we’re used to. DL: so all ultrasound providers are now in the same bucket? MK: GE have been an important partner over the last 10 years and we’d like to continue with, exact details are still being worked through. DL: guidance of operating costs of $90m was provided, so we’re now at $91m? MK: Yep, that’s incremental.
Closing comment from Michael This is the natural evolution of what we’ve been looking to do, taking a more direct approach in our key markets.
NAN Price at posting:
$4.60 Sentiment: Buy Disclosure: Held
(20min delay)