Earnings Transcript for NAN.AX - Q2 Fiscal Year 2022

Operator: Thank you for standing by, and welcome to the Nanosonics Limited 2022 Half Year Results and Investor Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Your speakers today are Mr. Michael Kavanagh, Managing Director and CEO; and McGregor Grant, CFO and Company Secretary. I would now like to hand the conference over to Mr. Kavanagh. Please go ahead.

Michael Kavanagh: Thank you very much and very good morning everybody and thank you all for joining the call this morning. I am joined here by McGregor Grant, our CFO. Earlier this month as part of the announcement on the revised sales model in North America, we did provide our revenue number for the first half been $60.6 million, which was up 41% on product corresponding period. And in today's half year results announcements and the corresponding investor presentation, we provide more granular details regarding the performance over the first half. There is a lot of information provided, especially in the investor presentation that I encourage you to have a look at. However, if I distil it down, there are really three key takeaway messages, I believe from the first half results. And the first is despite the disruption in the markets associated with the Delta variants and most recently, the Omicron variants that saw record high COVID case numbers, the business still maintained the positive momentum that we had achieved in the second half of the last financial year, so that we were very pleased with that result. The second insight I think, is that the COVID impacts themselves, they certainly varied in timing and severity across the different markets. And indeed, there wasn't a predictable universal response to the situation. However, in general, what we saw an experience was the market conditions improving between the first quarter where the Delta variant was the predominant variant and then the second quarter, which saw the emergence of the Omicron variant, even though there were spikes in case numbers associated with Omicron. So we saw an improving situation across the quarters. And there did seem to be an acceptance that while Omicron was more transmissible, it was clinically less severe. And it also coincided of course, with vaccination numbers that were a lot higher, and then the booster vaccination rolling out. So that's perhaps why we did start seeing some good recoveries between the first and the second quarter as well. So importantly, those improvements that we saw between the two quarters, they have continued into the start of the second half, where the market seems to be moving to a more endemic management versus pandemic management system with restrictions definitely easing significantly. Of course, we do have to remain cognizant of the general pressures that high caseload of COVID have on hospital systems and on staff shortages within hospitals as well. But hopefully we see that continue to improve. The third message really is that our forward-looking growth agenda, it has not changed. We continue to invest in the growth opportunities for the Trophon franchise globally, which I believe is significant as well as our product expansion plans in particular AuditPro, which was recently launched in North America as well, of course, our next product platform, our Coris product platform for endoscopy reprocessing, where development activities continue to progress well. So I'll provide a bit more detail on each of these and then hand over for questions. And combining the first two messages together, I guess, the global installed base did increase by 1,410 units to what is now 28,160 units globally, and that represented an increase of 12% over the last 12 months and 5% in the last six months. And while the number of new installed base units in the half was down by approximately 200 units or so over the last half this was mainly attributable to the first quarter installations, which I've mentioned that was the quarter most impacted due to the Delta variant. There was then a recovery in the second quarter, we saw a new installed base grow 14% quarter-on-quarter. So – and as I mentioned that positive growth between the quarters has continued so far into the second half. Looking at that the overall installed base by region, in North America, the installed base there in the half increased by 1,200 units, where there's now 24,680 units in the market that represents a 12% increase in the last 12 months and 5% in the last six months. And that North American installed base, it now represents approximately just over 40% of the estimated total addressable market of 60,000 units. So that's about 24,000 and over 24,500 units spread across 5,000 facilities. So it certainly is establishing itself if not considered the standard of care and continuing to grow quite nicely over there. In the Europe and Middle East region, the installed base increased 140 units in the half, where it is now 1,650 units. And that in total, installed base has grown 25% now in the last 12 months and just under 10% in the last six months. And the first quarter in particular was significantly impacted, where lockdowns and hospital restrictions were in place in the majority of the key markets. But interestingly, we did see quite a significant recovery in the second quarter as those market restrictions eased. And almost 80% actually of the total new installed base in the first half was achieved in the second quarter. And again, like in America, we're seeing continued progress positive progress in terms of installed base in Europe as we're now into the second half. In Asia-Pacific, the installed base grew 70 units in the half to where there is now 1,830 units of the region where the total installed base has now grown 10% in the last 12 months and 4% in the last six months. I guess we were all living through the restrictions that we all faced over the six months in the first half here in Australia and New Zealand. We also had a good uptake of upgrades in North America in the first half. And where, as you know, there is a significant opportunity exists for upgrades is now approximately 7,000 units of the older Trophon EPR have reached seven years of age. So they're certainly high target for upgrades. And in total, just under 400 upgrades were sold, which was up over 100 – about 125% or so on the last half. So certainly, the upgrade opportunity and upgrade sales are beginning to generate some momentum behind them. Moving on to revenue. Total revenue for the half, as you know, was $60.6 million, that was up 41% on PCP, and we were able to maintain that revenue level the same as the last half despite the adverse conditions with COVID. So where it was just slightly up on the last half. Breaking the $60.6 million in total revenue down, capital revenue for the half was $19 million. And that was up over - just over 100% on product corresponding period and 10% compared with the prior half. And that capital revenue of course includes revenue associated with new installed base as well as upgrade sales. Total revenue for consumables and service for the half was $41.6 million and that was up 23% on the corresponding period, but slightly down 3% compared with the prior half. And that 3% reduction, it does reflect obviously some disruption on ultrasound procedure volumes associated with the increasing infection rates from the Delta and Omicron variants. But also, this time around, we saw the impact of the Delta variant and Omicron variants impacting hospital staff availability, which I think has been in the commentary for most organizations. And this was experienced in particular in North America. Looking at North America itself, the total revenue for the half was $54.4 million. That was up 47% on PCP and just a 4% compared to the prior half. Capital revenue for the half in North America was $17.4 million. And that was up just over 140% on PCP and up 20% or 23%, compared with the prior half. And again, that increase in capital revenue includes the ongoing increase in new installed base and the growth in the sale of upgrades which demonstrates the importance and the opportunity that exists for upgrades which are now gaining momentum. Revenue associated with consumables and service for the half was $37 million, which was up 25% on PCP, but as mentioned, it was 3% down on the prior half for the reasons I've already mentioned. In Europe and Middle East, the total revenue for the half was just $3.5 million, that was down 6% on PCP. And that reduction was primarily associated with a reduction in capital revenue, because consumables was actually up slightly. And that reduction in capital revenue was due to the impact again of the restrictions associated with in particular the Delta variants, and hit mostly in the first quarter. And despite the Omicron variant coming in the second quarter, the restrictions did ease and that the new installed base numbers recovered significantly in the second quarter. And almost 80% of the first half new installed base was actually recorded in the second quarter. As mentioned, again, we're seeing good momentum continuing in Europe as we're now into the second half. Consumables and service revenue was $2.6 million for the half. And that was up 24% on our corresponding periods, and up just under 10%, compared with the prior half. Where it doesn't seem that the ultrasound procedure volumes, they don't seem to have been significantly impacted throughout the half despite the actual restrictions that have existed in the market. In Asia=Pacific, the total revenue for the half was $2.8 million. That was up a percent on product corresponding period. But it was actually down 32% with the prior half. To explain that the primary driver of the revenue being down in Asia-Pacific was the one-off sale of the 200 Trophon2 to upgrade units that took place in the last half. And if we exclude upgrades, capital revenue and H1 of FY22 was actually flat compared to the prior half, which wasn't too bad considering again, the restrictions as everybody on the call would have experienced here in Australia, in particular. Revenue from consumables and service was $2 million, which was up 5% on the prior corresponding period and just down 5% as well compared with the prior half, again associated with the restrictions and the impact of those on the ultrasound procedures. But overall, it remained pretty flat compared to last half when you exclude the upgrades. Then the third message was really our forward-looking growth agenda. It certainly continues and we continue to invest in the growth opportunities for Trophon on franchise globally, which we believe are quite significant, as well of Coris as our product expansion plans. And in the first half our operating expenditure was $42.7 million, which was up 29% versus prior corresponding periods and 13% on last half. But as you all be aware, when you look at the OpEx in the last half of last year, particularly the last quarter OpEx then was just over $20 million. So we were on the runways that we excellent the last half on. Included in that $42.7 million was $10.7 million in R&D. And that was just over 40% versus PCP and 11% versus prior half. As you're aware the company we announced the launch of AuditPro in the last talk which is a new infection prevention digital product platform that's used for traceability reporting and compliance. And that was launched at the APIC Conference at the end of June in 2021, which subsequent customer introduction suite of product commencing around September timeframe. The first sales of that product have commenced with the interest for the products and the pipeline for sales actually continuing to grow quite strongly. There are a number of new stakeholders in the sales process for AuditProin particular do IT departments being a digital solution within the hospitals, and which all require customer security reviews. So when we're -- when customers are looking to order, we have to do some detailed customer securities reviews. And while we have the necessary security measures in place from a data protection perspective to streamline the process of responding to all the individual requests, we're now also working towards ISO27001 accreditation, which is the internationally accepted standard for the management of information security, which will streamline the turnaround of the customer security assessment requests, as well as set the organization up for future developments in the data space of infection prevention, of course. And progress certainly does continue in our activities associated with the company's new endoscope reprocessing product platform, the Nanosonics Coris, and our continued performance with that technology continues to demonstrate the product exceeding all the standards for cleaning outcomes, including the most difficult soils and importantly costs all the complex channels of an endoscope. So that product is progressing quite nicely. And we will continue our investments for growth in the second half across R&D as well as the broader operations in the business, where the overall OpEx expected now for the year to be approximately $93 million or so including -- and that does include the extra investments we're making as a result of the revised sales model in North America. A few comments on some of the other key financial metrics. Gross margin for the half was 77%, which was a good outcome. The profit before tax was $3.3 million for the half that was up from $0.2 million in the prior corresponding period. And at the end of December, the company had $92 million in cash and cash equivalents, and the company has no debt. A few other quick updates, then I'll hand over for any questions. First of all, new corporate headquarters, which we are moving to and preparing to move to a new headquarters in the Macquarie Park precinct in Sydney. This will take place in the fourth quarter of this year. And all the preparations for this move all progressing well. The move itself is into two adjacent buildings, one that will accommodate headquarter offices and administrative functions, and the other our R&D and manufacturing facility. And what this move will result in is a significant expansion of our R&D capability with the establishment of new state-of-the-art laboratories in microbiology, chemistry and engineering. And it's actually going to deliver a threefold increase in capacity for ongoing research and development. A significant expansion of the manufacturing capacity is also underway to support a growing global demand for Trophon and, of course, the company's expanding product portfolio plans. And we're very pleased that the growth of the organization has been recognized by the New South Wales Government and the move and expansion of our facility is being supported by a government grant through the New South Wales government’s Jobs Plus program, which is facilitated by investments, New South Wales. A brief update on the transition to the revised sales model in North America that we announced two weeks ago. And as a reminder, Nanosonics and GE we have revised the current North American sales model and that's effective now from February through to the end of the current distribution agreement with GE that ends in June this year. And discussions are underway for a new reseller agreement that would come into effect from the July 1, 2022 and be based on this new revised sales model. And under this revised sales model, what GE are doing now they will consume all their inventory and transition to what's called a pass through sales model for its ongoing sales of Trophon. And the revised sales model will see Nanosonics then manage all inventory, we'll ship install and train the new GE Trophon customers, which will then become Nanosonics customers for the ongoing provision of old consumables. And GE were also -- they are currently now commenced the transition of all existing GE Trophon customers to Nanosonics for the ongoing provision of consumables. So what this means is from FY23, in addition to 100% of the sales of consumables to be made by Nanosonics direct operations, and increasing the proportion of new installed base and upgrades is expected to be made through the direct channel and overtime, this is expected to result in a corresponding increase in revenue and margin for the company. The transition plans are now well underway and progressing well. Nanosonics we already have an extensive sales capability with 21 sales territories already established across the United States, over 50 salespeople and clinical people across those territories. And we will add some new sales people and clinical headcount into a number of those territories. Recruitment is already underway for those and offers made in many cases to those roles. So we feel confident of having the necessary sales infrastructure in place and in full. The company we also have a very well established and experienced logistics operation based in Indianapolis, which will ensure continuity of supply to customers. And the current logistics facility in Indianapolis is over 20,000 square feet and increased warehouse capacity through new racking et cetera has already been implemented with the opportunity to expand capacity further, if that is required at this moment. We don't believe that is required. So finally, in terms of some updates to some of the guidance for the year. And despite the inherent risks and uncertainties associated with COVID-19, we remain optimistic. But what seems to be a shift from pandemic to endemic management measures coming through now, that will continue to improve the market conditions and further enable increased capital and consumables growth to end customers. And as announced two weeks ago, there will be a revenue impact of between $13 million and $16 million associated with the transition to the revised North American model. And that is primarily associated with GE transitioning to a non-stocking distributor. As I mentioned, they're currently consuming inventory and then move to a pass through. We do however, expect installed base to continue to grow. Procedural volumes to continue to improve, leading to further growth in consumable sales to customers. And further growth in upgrades we had a strong first half. And we expect to continue to see good upgrade growth again in the second half. Albeit, there’s some of the anticipated growth that we had for the second half will probably defer to FY’23 due to the transitioning sales model in North America. But we still expect to see good upgrade volumes coming through in the second half. The gross profit margin should be approximately 75%. And that takes the product mix and certain component costs and freight costs being absorbed due to ongoing supply chain challenges that the company is managing well. And we're still able to manufacture and deliver in full on time to customer demand. But we do have to manage like all companies the freight, and there are certain components with COGS have gone up at this stage. And operating expenses, as I mentioned, they are expected to be approximately $93 million for the year, which does include the incremental costs associated with the transition to the revised sales model in North America. So I'll pause there. And with that, I'll hand over for any questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Josh Kannourakis from Barrenjoey. Please go ahead.

Josh Kannourakis : Hi, Michael and McGregor. Thank you for taking my call. First question just with regard to the OpEx outlook. Could you give us a little bit of a feeling for the medium-term outlook for OpEx and just maybe some extra context around within those numbers, how it's sort of broken up between maybe the core business and some new products and the transition costs as well?

McGregor Grant: Okay, Josh. Thanks. So OpEx be $93 million or so. Of the first half OpEx that $10 million of R&D. And so if you annualize that, you've got that sort of the proportion of OpEx between R&D and OpEx, and non-R&D, OpEx. And so the significant proportion of our costs is related to headcount, at least the two-thirds of that. And while we've seen a significant growth in OpEx between FY “21 through FY “22, which is really associated with growth and investment in our sales capability in Europe, some extent. Of course, now some further expansion in North America, together with investment into supporting developing the markets in China and Japan and so on. But we’re seeing a significant growth for FY ‘22, I don't expect that we will see the same level of growth into FY ‘23, [indiscernible] we've made a significant investment during this period. So I think the growth will be more modest than what we've seen in – what would be seen this year. And as I said, the majority of that increases is in the front end of the business within the regions, but there is some, of course, some incremental costs in the backend as well.

Josh Kannourakis : Got it. And just on that, McGregor, in terms of, I guess, Coris and some of the new product initiatives around AuditPro. Is there any extra context you can give us around that in terms of whether or not the cost basis right sized to facilitate those products in market and how we should be thinking about the timing of potential other costs coming in, in relation to products like Coris?

Michael Kavanagh: Yeah, I think when we get to bring Coris to the market, obviously, there'll be incremental marketing costs that will go with introducing and launch costs that will go with introducing a product to market at that point in time. The channel model, or how we go to market is - hasn't been disclosed at this stage. But you can imagine, you've seen what we do around the world globally with Trophon. So it's presumably may not be too dissimilar of having a hybrid model between direct and potentially distributor partners in different parts of the world. So though, there will be an incremental, but not a wholesale less replicate what we're doing with Trophon now for the introduction of a new product.

Josh Kannourakis : Fantastic, thanks. And just final question for me, just around the cash flow. I imagined some of the increase in inventories and the like was related potentially to GE and stocking coming up for this half. Could you give a little bit more context and just how, I guess you're thinking about into the second half sort of cash flows into the second half in light of the change in the revised GE agreement?

McGregor Grant: Yeah. Thanks, Josh. And so first of all, as you would have seen -- if you've seen the balance sheet, our inventory holdings has increased somewhat since June. And that has been a deliberate decision on our part to carry more inventory, particularly in the field as a contingency for the sort of interruptions in freight and so on. In terms of the inventory that we have in the supply chain to support the transition from GE to the direct team, we don't see a significant impact of that, because the expectation is that the sales of new installed base and upgrades will continue to grow and we'll need to carry inventory for that. So we may carry a little bit more ourselves, but I don't think it'll be hugely significant given that we are carrying quite a bit more inventory already in the field. So I think that's probably how that one's going to play out. You asked a question about cash flow as well. I'll just touch on that. So clearly, that growth in inventory has impacted on cash flow. And the other impact on cash flow and a half has been a bit of a CapEx that we've been spending on the fit out of the new headquarters.

Josh Kannourakis : Okay, great. Thanks, guys. I'll get someone else to go.

Operator: Thank you. Your next question comes from Joshua Ting from Bank of America. Please go ahead.

Joshua Ting: Good morning, Michael and McGregor, and thanks for taking my questions. I was hoping you could just speak a little about the new agreement and with Nanosonics taking over the customer relationship. If you could give us a little bit of color on how the strategy might change in relation to upgrades and how bringing that in-house Nanosonics might be able to look to increase the upgrade rates.

Michael Kavanagh: Yeah, but thanks for the question. The majority of the upgrade opportunity that exists in North America are actually associated with existing GE Trophon customers. And the reason for that is we only went direct in North America about five, six years ago. So what's happening is one of the benefits of GE transitioning all the existing GE customers across Nanosonics for the ongoing provision of consumables is we'll be setting up the accounts, we will be servicing those accounts, and we'll certainly be able to go in and drive the upgrades cycle and hopefully raise the adoption of upgrades amongst the customer group. And what comes then for the company with that, obviously, is an improvement in margin as there won't be a distributor margin associated. I mean, GE can still sell upgrades, but we just imagined that the focus won't be on that. There'll be more on new installed base associated with the sale of ultrasound. So we expect to see the lion's share of upgrades coming through the Nanosonics direct channel.

Joshua Ting: Okay, great. And could you maybe just following on from that, give a bit of an idea of what the average age of the devices that have been upgraded so far? So now you sort of reference that seven-year mark? Is that the age that you're asking in the last time a little bit older?

Michael Kavanagh: Probably around that. And some actually few younger and some a bit older, but they probably does average around that seven years. And what's happening, and why it's important for us to and having the direct access to all the GE customers, is a quite a decent percentage of new IB sales that are being made now are into hospitals or going deep into all the different departments within existing hospitals where Trophon fund may be in one or two departments but I think four or five departments that should have Trophon. So we'll be going in and going deep within those accounts. And then of course, when we're selling deep into those accounts, with Trophon2, we go to all the other departments that have the old Trophon EPR is to look to upgrade those. And if they're at five years plus, they will be considered for upgrade. But on average, I believe at the moment it is probably around that seven years.

Joshua Ting: Great. Thanks. That's all from me.

Michael Kavanagh: Thank you.

Operator: Thank you. Your next question comes from Bosco Feng from Goldman Sachs. Please go ahead.

Bosco Feng: Hi, Michael and McGregor. Can you hear me?

Michael Kavanagh: Yes.

Bosco Feng: Hi, Michael, and McGregor. Can you hear me?

Michael Kavanagh: Yeah, we can hear you.

Bosco Feng: Awesome. Thanks for taking my questions. Can I just us three today. The first one is you previously guided to no disruption and consumables as a result of the revised sales model with GE in the U.S. Are you still maintaining the guidance today considering the contract negotiations that might have taken place in the last two weeks or so?

Michael Kavanagh: Yeah. What's really important here is that both BE, when we say no disruption of consumables, there's no disruption in sales of consumables to end customers. We need to -- both companies need to ensure continuity of supply so that they can continue their clinical practice and their high level disinfection requirements. So both companies are diligently working together to ensure that that does happen. We don't foresee any disruption in the ability to be able to supply either through us or either through GE. It's a transition process. It's not like it just sold switches overnight. GE have inventory of consumables, probably enough consumables to keep them going through a period of this half. And indeed, if the full transition isn't complete. After they've consumed those, they may need to purchase more if all everything has been transitioned. But the general principle is really from a customer experience perspective to make sure both companies ensure the continuity of supply and we're confident with that.

Bosco Feng: Can I follow up on that? In terms of the stock that GE is currently holding, can you give us a sense of how much stock they currently have, which has yet to be sold? Because on the previous call, this press a lot of confidence that destocking with GE won't impact FY23 sales, given the revision in the sales model, but do you still hold that today? And particularly given how strong capital sales has been over the period with GE again accounting for 53% of that?

Michael Kavanagh: Yeah. What I said in the last call when we announced the revised is that there is an impact that there's a $13 million to $16 million impact that will come through in this half. And that is really associated with that destocking and whether consuming their inventory of consumables, but then not replenishing. So normally, there'd be just be continually replenishing their inventory, keeping their safety stock at a high -- at the proper levels. So there is going to be an impact on revenue to be clear associated with that destocking.

Bosco Feng: Got it. But no impact, no carryover impact into ‘23. Is that right?

Michael Kavanagh: Correct. From ‘23, one thing that's going to be quite good about it is the revenue that is recognized then will be almost one to one equivalent to the revenue, the sales that are to end customers. So that won't be the source of inventory, those inventories impacts that have always been there in the past.

Operator: Thank you. Your next question comes from John Copley from E&P. Please go ahead.

John Copley : Hi, Michael and hi, McGregor. Thanks for taking the questions. First off, I just wanted to follow on from the last set. And just to round off my understanding on one of the key issues here. So are we to understand then that from FY23, GE -- sorry, Nanosonics will be able to meet all of the demand previously serviced by GE. Is that the upshot of what has been discussed today?

McGregor Grant: All the customer demand. Yeah.

John Copley : Right. Excellent. Thank you for clarifying that. Then the other question was still in the GE side of things. You said over time you expect NAN will see an uplift in the installed base. So in other words, growth and revenue growth in the installed base, and also an increase in margin. So is that expectation impacted, and how's it impacted by whether or not a pass through sale agreement can be struck with GE?

Michael Kavanagh: I don't -- it's not overly impacted as to whether or not the pass through sales will go through GE or not. Our intention by increasing the sales infrastructure that we have is we'll be able to return to the pre-COVID 2,800 to 3,000 new installed base number per annum. And we're comfortable and confident as based on the market demand and the infrastructure that we'll have in place, we'll be able to achieve that. Just to go back to your first point with respect to the increase in revenue. Because where that's coming from is because more of the capital units now both for new installed base as well as for upgrades are expected to come through the Nanosonics direct channel, well then we get the corresponding margin improvement on that as well. Because GE won't be selling us and we'll be selling it at a higher ASP than what we had been selling it to GE yet.

John Copley : Okay, and are you able to quantify any of that margin benefit.

Michael Kavanagh: So on an upgrade, you can imagine it could be somewhere in the order of $1,500 to $2,000. And similarly on a on a new installed base. So there's this there's probably almost a $2,000 uplift per unit, whether it's new IP or upgrades that will be coming towards that.

John Copley : Okay, and sorry, that's actually just clarified. What about in terms of gross margin percentage terms?

McGregor Grant: Well, the gross margin percentage will increase as a result of the increase in price. And gross margins we've already talked about capital sales being at gross margin of around about the sort of mid-60%. So that will most likely increase to something slightly over 70%.

John Copley : Okay, thank you. And final one from me, just on your OpEx and gross margin guidance. So probably a two-part question here. In terms of gross margin, you're guiding now to 75% for the year previously, I think that was greater than 75%. Can you just to confirm whether I'm correct in that thinking? And whether that implies then a gross margin second half, obviously 75%, is that the expectation? And the other side to that is on the OpEx front the previous guidance was $90 million, then it was stated two weeks ago that there was an additional $1 million expected, so that brought us to $90 million. But now this is increased again to 93. So can you just let us know where that additional $2 million that’s come from and whether it will be one awful, we should capitalize that going forward? Thank you.

McGregor Grant: Sure. Just to the OpEx question. A couple of things there. So FX is having a bit of an impact on our OpEx numbers. That's working against us. And we previously guided around the sort of $91 million. So when you take into account the extra million, we've talked about the end effect -- the effect of FX in that there really isn't anything else that's increasing OpEx. The first part of your question, just remind me again, John? Gross margin, yes. We did talk about it being over 75. We weren't talking about it being 78, we were talking just over 75. So 75 is where the number will land on a full year basis. The impact of margin -- the impacts -- the things that are impacting margin will be in the second half have to do with the reduced sales talked about, it's also to do with ongoing increased costs around freight and production volumes will be slightly impacted. And so we'll see slightly different recovery outcomes and component costs have increased a little bit as well. Combination of all of those factors having us at around about 75% for the full year.

John Copley : Thank you.

Operator: Thank you. Your next question comes from Josh Kannourakis from Barrenjoey. Please go ahead.

Josh Kannourakis : Hey, guys. Sorry. Just wanted to have a quick follow up just. With regard to the GE arrangement. So in terms of the customers, one -- I guess one key concern from people has been around you getting access to the individual customers, in terms of looking at the upgrades if the service agreements are there in place. And there's a number of these units that are past seven years. Will you then take over some of the service arrangements and does that point of communication, I guess, enable you guys to sort of force or at least bring forward some of those upgrades in the market?

Michael Kavanagh: I think the service contract continues currently, it will continue with GE so they'll continue to provide service. And we'll still be able to provide the necessary service parts to see how those contracts. As is customary, what generally happens is as units age, and then as they come up towards the end of a service contract. Well, then that's when there are really big opportunity to upgrade. Obviously, when we are in direct talking to these customers, we'll understand where they are if they do have a service contract, where they are in in that cycle of that service contract and then we can be able to push the upgrades at that stage.

Josh Kannourakis : Got it. And just a bit point of clarification in terms of the unit pricing that you mentioned the uplift on the 1,500 to 2,000 that's U.S. dollars, I think, isn't it not Aussie?

Michael Kavanagh: Correct, correct.

Josh Kannourakis : Yep. Perfect. Just wanted to clarify that. Thanks, guys.

Michael Kavanagh: Thank you.

Operator: Thank you. Your next question comes from John Hester from Bell Potter. Please go ahead.

John Hester : Good morning. Thank you. Michael. Just a quick update if you would please. On Japan, you normally talk about that extensively, where is that market development at?

Michael Kavanagh: Yeah, John, we're continuing to work with the various societies unfortunately in the last six months Japan has been in several emergency. So most things have been in lockdown pretty much every conference that was scheduled up there has been cancelled. But we still been able to continue to engage with key opinion leaders. There are some guidelines that are coming out now where high level disinfection is beginning to be mentioned. We're very much looking forward to the markets opening up now in Japan and being able to get into a lot more actively than we've been able to over the last six months. But we have built up our infrastructure up there as well in the last six months. We have put on some new headcount to give us the reach both in sales and in clinical because education is critical up there. And so we're so confident in the opportunity in that market.

John Hester : Okay. And just moving on, just talking about AuditPro. So you mentioned briefly earlier in the call, and you said that IT departments are getting involved in customer security assessment requests have been forthcoming. Can you just elaborate on those comments? How many clients are you talking to about AuditPro at the moment? I'm just sort of trying to get a sense as to whether we should be sort of building in a revenue expectation for FY23?

Michael Kavanagh: Yeah, look, we'd like to see revenue certainly coming in in FY23 For as the pipeline as -- for the product is certainly in the hundreds and every day they're out there [technical difficulty].

Operator: Ladies and gentlemen, this is the conference operator. We have temporarily lost our speakers please hold and we will get them back on the line. Thank you we now have your speakers back on the line. You question is from John Hester from Bell Potter. Please go ahead.

Michael Kavanagh: Hi, John. Are you still there?

Operator: Thank you. Your next question is from Mathieu Chevrier from Citi. Please go ahead.

Mathieu Chevrier: Good morning, Michael. Good morning, McGregor, thank you for taking my question. Just had a quick one with regards to upgrades. Have you encountered customers who've decided not to upgrade or to no longer use Trophon any reason?

Michael Kavanagh: Not -- no longer use Trophon. Some of the ones that we talked about upgrades, it's more about not a situation of not wanting to upgrade, it's about getting into the budget cycle. So we're confident that we can ultimately continue to grow the upgrade pool. It's just a matter of those customers ensuring that they've got the necessary funds built into their budgets.

Mathieu Chevrier: Yeah. Understood. And just, whilst around that topic, pretty staying from competitors. Are you using anything new? I mean, it's already been a few years now that this product has been launched, as you said and going through an upgrade cycle now. Have you seen new competitors come along, or anything --?

Michael Kavanagh: No. I’d say, the landscape really hasn't changed for many, many years across the different markets. So there's no new products per se that they exist, and that have not existed for many years. So that environment really hasn't changed.

Mathieu Chevrier: Okay, thanks for that. And just finally, in terms of AuditPro, I guess John's trying to pass a question earlier. Perhaps what proportion of upgrade sales, do you expects will include AuditPro? Is that something you're trying to tag along the upgrades? And in terms of dollars what could it look like relative to consumer?

Michael Kavanagh: Yeah, we're not we're not directly linking AuditPro with the upgrade. It’s sort of a standalone product in and of itself. Certainly, you require Trophon to it, when we're talking to customers about AuditPro. And they -- once they understand the benefits of it, if they are using EPR well, then obviously, we've got to talk about upgrades to those customers. But at the moment, we're not really joining both of those products together. The overall opportunity for AuditPro, however, it should be -- it's almost you should look at it like it's an ultrasound product rather than it’s a Trophon on product in that the AuditPro is designed to capture the data associated with every ultrasound procedure, and capture the information as to whether or not that probe requires to be low level disinfected, high level, disinfected, sterilize, et cetera. So in one sense, it should exist beside every ultrasound console, as opposed to thinking about as it's been beside every Trophon. So it's really more an ultrasound product. That's how we're thinking about us. And therefore, overtime when you think of the volume of ultrasound consoles that are out in the marketplace, the ultimate opportunity for a product like AuditPro is actually quite large.

Mathieu Chevrier: Yeah, and in terms of the competitive landscape for that specific product, what does it look like?

Michael Kavanagh: There are quite a number of different track and trace type systems that exist out in the marketplace for instrument decontamination. Not that many, nothing really relevant in the ultrasound space. And nothing really that has the inbuilt compliance and education components associated with it as well. Because what AuditPro does is as I mentioned before on previous calls, and in previous presentations, there are over about 150 different ultrasound procedures that confer semi-critical status on AuditPro. And what that means is if it's a semi-critical status is conferred on approval then it should be high level disinfected. So what AuditPro does is in one sense ensures that infection prevention requirements are a fourth off rather than after source, in that the customer actually has to choose when -- knowing the procedures are about to carry out. They have to choose whether that procedure is critical, semi-critical or non-critical. And then depending on what's chosen, if it's semi-critical or critical they choose that well then it automatically links in the cloud to an associated Trophon cycle. And all that data then is centralized and which enables the customers to actually analyze and look at the data in real time from a compliance perspective.

Mathieu Chevrier: Thank you. That's all I had.

Operator: Thank you. Your next question comes from Naire Gros [ph] private investor. Please go ahead.

Unidentified Analyst: Good morning. It's Naire Gros here. I’m a shareholder. Just a question about you said you were moving to Macquarie Park precinct and you're doing R&D expansion in the areas of microbiology, chemistry, engineering. Just wondering if you could talk a little bit more about that you're actually going to be researching?

Michael Kavanagh: Yes. So when the organization started, it was over in a number of small units in Alexandria. And then just over five years ago, we outgrew that and moved over here to where we are today in Lane Cove, which is in the old Colliers [ph] global headquarters. And five years later, we've outgrown that from an expansion perspective. And now taken two buildings over in Macquarie precinct on [Indiscernible] Road. And the expansion that we're doing is not just from a headcount but in terms of the capacity with our laboratory sides across microbiology, and chemistry and all the engineering laboratories. We're going about a threefold increase in the actual capacity for in those laboratories which then enables us to continue to expand our R&D efforts overtime.

Unidentified Analyst: Can you hear me?

Michael Kavanagh: Yeah, yep.

Unidentified Analyst: Okay. I was just wondering what you were going to be researching in microbiology, chemistry, engineering?

Michael Kavanagh: They're interrelated disciplines. So the areas that we've discussed in the past that are our primary areas of focus are around instrument cleaning, instrument decontamination, storage solutions, environmental decontamination. And there's the whole data and traceability components as well of infection prevention.

Unidentified Analyst: Okay, so it's all related to Trophon type stuff?

Michael Kavanagh: Not necessarily. But Trophon in one sense and that it's an instrument decontamination unit, but like Coris is a totally new technology platform and does not relate to Trophon at all. So it may leverage some of the research it may leverage some of the fundamental IP that we have in some of our existing technologies, or might be around generating new IP.

Unidentified Analyst: Okay.

Michael Kavanagh: I think we're on the hour. So I think -- we'll call it there. And thank you all again, very much for attending the call. And we'll continue to -- hopefully continue to grow internationally with both Trophon well as expanding our portfolio. So thank you all very much.

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