Nanosonics Limited (NAN) Earnings Call Transcript & Summary

Good morning ladies and gentlemen. My name is Maurie Stang, and I'm the Non-Executive Chairman of Nanosonics Limited. I would like to acknowledge the traditional owners of the various lands in which we meet virtually today and pay respect to all aboriginal elders, past and present, and acknowledge today's aboriginal communities by the custodians of these lands. I wish to extend a warm welcome to all shareholders who have joined remotely with me in this room. And I'm joined by the Nanosonics Board of Directors, Company Secretary and representatives of the company's auditors, Ernst & Young. I have been advised by the Company Secretary that we have a quorum for today's meeting, and I therefore declare the meeting open. The number of valid proxies received by 11:00 a.m. on Wednesday, 17th of November 2021, was 596 proxies, representing over 174 million shares or 57.7% of the company's 301.7 million shares on issue. In accordance with the Corporations Act, the minutes of this meeting will record each resolution, the total number of proxies exercisable by all proxies validly appointed, the directions in the proxy forms and the results of the polling. I'd like to take this opportunity to introduce our Board, the Company Secretary and the auditors of Nanosonics: Steve Sargent, Lead Independent Director and Deputy Chairman; Michael Kavanagh, Managing Director, CEO and President; Lisa McIntyre, Non-Executive Director; David Fisher, Non-Executive Director; Mary McDonald, Non-Executive Director; Geoff Wilson, Non-Executive Director; McGregor Grant, Chief Financial Officer and Company Secretary. As required by the Corporations Act, the company's auditors, Ernst & Young, are also in attendance today, represented by [indiscernible] Martinez. The Board, Company Secretary and the company's auditors are available to respond to any questions you may have during the course of this meeting. Today's meeting will commence with my Chairman's address as CEO, Mr. Michael Kavanagh, will then deliver his address. This will be followed by the formal business of the meeting. When the formal business of the meeting is concluded, there will be an opportunity for further questions. As this AGM is being conducted virtually, I'll now provide some housekeeping instructions in respect of how to ask questions and how to vote. Shareholders can ask questions, which must be typed. If you log on as a shareholder, the question icon will be available to you at the top of the screen. [Operator Instructions] We will set aside time after I've introduced all of our resolutions to answer any questions on the resolutions. In accordance with our usual practice, we'll also invite general questions after the formal business is closed. It would be appreciated if any general questions could be submitted after the formal business is closed to avoid them getting mixed in with any questions received from shareholders on the resolutions during the formal business. While there'll be time for voting after I've introduced each resolution, you may submit your votes at any time until I declare the poll closed. There will also be some time to complete your voting after we've addressed any questions that are raised in relation to the resolutions. The voting page is accessible by selecting the voting icon at the top of your screen. To vote, simply select the direction in which you would like to cast your vote and the selected option will change color. There is no Submit or Send button. Your selection will be automatically recorded. Voting will be conducted on each resolution by poll. For this purpose, I now declare the poll open. Ladies and gentlemen, it is now my pleasure to deliver the Chairman's address. Good morning, again, ladies and gentlemen. My name is Maurie Stang, and it's my pleasure to welcome you to the Nanosonics 2021 Annual General Meeting. Whilst this meeting is being conducted in a virtual manner, we have made arrangements to ensure shareholders' engagement and interaction is strong, and do look forward to returning to our normal in-person and hybrid formulas in the future. The FY '21 year, whilst within a challenging environment, was one of both momentum and innovation across our broad growth agenda. Your company proactively met the needs of its customers, adapting to new and innovative ways of conducting business, whilst expanding its sales, marketing and service offerings across multiple geographies. The Nanosonics team has delivered a truly impressive series of milestones across all facets of the business. This has resulted in a strategy and a capability to continue to grow in a global market that is showing encouraging signs of increased activities and access. In parallel, the fundamentals of both regulation and customer demand for automated reprocessing continue to strengthen, and we see a more optimistic landscape going forward. Nanosonics' growth and success continue to be driven by our people, our culture, our leadership team and the support and guidance from our Board. This unity and collaboration has ensured the health and safety of our team through the challenges of the global pandemic, whilst delivering a work environment, which is capable of continuing to lead in our commitment to infection prevention for life. This is illustrative of our people living our values, collaboration, innovation, discipline, agility and the will to win. These represent our core values that defines everything we do at Nanosonics. We recognize the tremendous value that our people provide to the company. Throughout the year, we continued to expand our capacity and capability with a total number of employees increasing 9% to 339. Our people's focus was recognized with the exceptional results in the company's Employee Engagement survey, which showed that almost the entire workforce is strongly aligned with the company's purpose. And importantly, they understand how their work individually contributes to the goals of the company. As an infection prevention company, the opportunities for Nanosonics are in greater focus than ever. North America has experienced a significant growth in the usage of ultrasound in recent years. This has contributed to an increase in the opportunity for the trophon technology in North America where the addressable market has been estimated to be 50% greater than previously measured, growing to some 60,000 units. We are now witnessing an improvement in the fundamentals for adoption of trophon in the European region with a number of guidelines increasing, and Nanosonics is increasing its investment in this region to take advantage of these opportunities. Similarly, we're expanding our business throughout Asia Pacific, including the important markets of Japan and China. It is very pleasing to see that Nanosonics continues to deliver on its -- growth of its installed base of trophon and the associated ecosystem, particularly in the second half of the year, whilst proactively responding to the significant impact of COVID-19 in creating unprecedented headwinds. This clearly demonstrates the strength and resilience of Nanosonics' business model, its solid relationship with GE Healthcare and other global OEMs, its distributors, together with the inherent value proposition of its proprietary infection prevention ecosystems and services. On the 28th of June 2021, our release of Nanosonics AuditPro extended our activities into digital health. AuditPro represents Nanosonics' entry into this important area of data and compliance in infection prevention, which in turn has the capacity to increase adoption of the automated HLD across more and more procedures. Consistent with our significant investment in R&D and innovation is our new CORIS platform in endoscopy, which is based on the principles of automation, patient safety and enhanced workflow. This development program addresses important unmet needs and has been driven by a deep engagement with customers and industry. Michael will do a deeper dive into this new innovation. Beyond these opportunities, we remain firmly of the belief that leveraging our skills into the broader infection prevention market will be our growth engine and significant investment is made in our R&D program as well as our new initiatives under a dedicated group to identify and access strategic acquisition opportunities across key vectors of the infection prevention landscape. The expanded technology group is now focused in 4 areas: our core R&D; the all-important sustaining engineering; external technology evaluation; and Nanosonics investments. These important capabilities allow us to engage with a combination of organic and collaborative opportunities, which support our position of growth and always customer focus. With the ongoing growth opportunities and momentum of the business, we are pleased to announce that in the first half of calendar 2022, we'll move to a new global headquarters in the Macquarie Park precinct here in New South Wales. The move will see a significant expansion in the company's R&D, a doubling of our manufacturing capacity and capabilities as well as increased capacity for operational support for the growing global business. The significant investment in the relocation to the new global headquarters is supported by the New South Wales government over 3 years through its Investment New South Wales Jobs Plus Program and positions the company well for its ongoing global growth by increasing capacity in all functions of the organization. I'm particularly excited about the construction of new state-of-the-art laboratories with an almost trebling of laboratory space that will increase our R&D capability and capacity. We thank the New South Wales government and, in particular, the Premier, Dominic Perrottet, the Honorable Stuart Ayres MP, Minister of Jobs, Investment, Tourism and Western Sydney and the CEO of investment New South Wales, Amy Brown, for their recognition of the Nanosonics' growth story. We look forward to continuing our growth trajectory with a strong commitment to New South Wales and the scale-up of our facilities, which will directly support our growing international business and exports. Nanosonics' sustainability report contains an extensive amount of information on the environmental, social and governance practices that are core to the company's mission, future success, and indeed, represents the company's DNA. I trust shareholders will see that the report showcases our approach to caring for our employees, customers, suppliers, and critically, our investment in social responsibility and the environment. In our sustainability report, I was very proud to see the scale of recycled end-of-life products and service parts that were responsibly recycled as well as the increasing scope of our reporting in this important area of climate change and water consumption. Throughout the year, we continued to focus on our continually improving the environmental impact of our products. A good example is that by our customers using of our trophon technology, they often replace a method that relies on the use of toxic chemicals, whereas the byproduct from using trophon is oxygen and water. I'm particularly proud to see the strong diversity results across the company and recognize the value and creativity that supports our innovative and forward-looking business. Diversity and inclusion are recognized as important drivers of our growth and a core aspect of the Nanosonics culture. The Nanosonics workforce now represents around 29 different nationalities with 41% of employees being women, 38% of senior management positions in the organization are also held by women. The business has an active program of community contribution and initiatives, which were adopted during -- by the Board during the past year to formalize and expand the company's commitment to society. Despite our record investments in an expanded team, accelerated R&D and resources for future growth, the company continues to increase its cash reserves. These cash reserves serve the company in a number of ways. They provide a significant degree of stability and allow the company to continue to pursue its strategic objectives -- its strategic growth agenda in what is most uncertain times. Our Board and management are actively engaged in reviewing our priorities, identifying opportunities for investment and ensuring that Nanosonics is on track to deliver improved social and healthcare outcomes. This remains entirely consistent with the building of shareholder value through the best use of the company's free cash flow and capital reserves. I would again like to recognize the outstanding stewardship and commitment of our Board. Over a number of years, the company has gone through a process of Board renewal. With each Director joining, the business has benefited from an injection of valuable expertise and industry insight. The Board reflects diversity in a number of important and complementary ways. Our experienced Directors bring a mix of skills and perspectives that strongly support our growth and governance objectives, and through the Board committees add real value to every dimension of our business. I believe that we currently have an appropriate mix of skills and experience on the Board. But as we consider ongoing renewal, we will continue to review the skills needed to best serve Nanosonics now and into the future. We've all seen, in the most demonstrable way, the negative impact that unchecked pathogens can have in virtually every field of human endeavor. We at Nanosonics believe that we have a significant contribution to make in partnership with our customers, regulators and our industry to deliver a safer and more efficient health care system to the benefit of all. We believe that our expanded investments in the future, such as CORIS, together with our strong financial position, our outstanding team, provide the opportunity for continued growth and innovation, not only now, but well into the future. I'd now like to invite the company's CEO and President, Mr. Michael Kavanagh, to deliver his presentation. Michael has overseen now a period of outstanding expansion for the company over the last 8 years, and I'd like to introduce Michael Kavanagh. Thank you.

Well, thank you very much, Maurie, and a very good morning, ladies and gentlemen. As Maurie mentioned, despite the challenges of the COVID-19 pandemic during FY '21, the year was still a year of significant ongoing achievement for the business as we continued to execute across all aspects of our long-term strategic growth agenda. As market conditions improved, the business saw a significant recovery in the second half of the year where a returned to pre-COVID-19 growth momentum levels was definitely experienced. For the total year, the global installed base of trophon units grew 13% to 26,750 units. Importantly, however, what we saw was a significant recovery in the second half as the market conditions improved with the second half installed base actually up 20% versus the first half, with an overall increase of over 3,000 units for the year, with all regions performing well. The total revenue for the year, it grew 3% to just over $103 million. In constant currency terms, that total revenue was actually up 12% for the year. And similar to the installed base as market conditions improved in the second half, particularly in North America, where access to hospitals improved and ultrasound procedure volumes trended back to pre-COVID levels, we saw revenue grow 39% compared with the first half to $60 million. As we normally do, we break revenue down between capital revenue and consumables and service revenue. And breaking it down into capital first, despite the 13% increase in new installed base, capital revenue for the year was actually down 11% to $26.7 million. It was a very specific reason for that, which I'd like to explain, and that was because it was primarily associated with a reduction in the number of units sold to our distributor partner GE Healthcare in North America in the first half of the FY '21 financial year. And that was as a result of the COVID-19-related decrease in installed base growth, particularly in the fourth quarter of FY '20 and the first quarter of FY '21 and the corresponding impacts that did have then on GE's inventory levels. But importantly, again, moving into the second half of the year, the capital revenue actually increased 84% compared with the first half. And that, again, is as market conditions improved, the installed base growth recovered and GE resumed normal capital purchasing patterns. And it is important to note that this impact of the GE purchases was only felt in the North American region. In the Europe and Middle East region, total capital revenue for the year was up 91% to $2.7 million. And what's important to note here is as the majority of units placed in the U.K., which is actually our largest market in the region, are under what's called the managed equipment service model where no capital revenue is actually recognized because we place the capital there and then an all-inclusive price for consumables is charged, but the increase in capital revenue that we did see in the region gives a good indication of the growth being experienced in markets outside of the U.K. as the fundamentals for adoption improve across the region. In Asia Pacific, total capital revenue for the year was up 143% to $2.7 million. Now if you exclude upgrades from this overall revenue increase, the capital revenue was still up 36%. So that was more capital revenue associated with new installed base growth, which again is a strong result. But of course, upgrades are an important part of our capital revenue growth moving forward, and it was very encouraging to see some upgrades coming through in FY '21 in the ANZ region. So moving over to the consumables and service side then, revenue increased 9% to $76.4 million. And it's important to look at this on a constant currency, in particular, because it better reflects the volume growth, and in constant currency, that revenue actually would have been in the order of about $84 million or up 20%. And as you all know, the first half consumables sales were impacted due to the effect of COVID-19 on ultrasound procedure volumes in the hospital systems. However, H2 saw a positive trend towards pre-COVID-19 procedure levels, with revenue from consumables and service up 27%, or 39% in constant currency in H2 compared to H1. And importantly, towards the end of FY '21, all indications were that ultrasound procedure volumes were certainly approaching the pre-COVID levels across the majority of our markets. And you'll find a lot of detail on the FY '21 financial performance in the annual report and in the full year investor presentation that can be found on our website, and I do encourage you to have a look at that because it does give a lot of insightful granular information that I'm sure you'll be interested in. So moving on to the strategic priorities for the business. And despite the impacts of COVID-19 throughout FY '21, our growth strategy has not changed. There are 4 key strategic priorities that the organization is focused on. The first is associated with all the work we do to establish our trophon technology as standard of care for ultrasound reprocessing. And this involves all the work that we do with societies and regulators on the establishment of guidelines, all the clinical educational work that we do in the healthcare community and importantly, ensuring all our customers have a very positive experience with all aspects of the product and the Nanosonics brand. The second aspect of our strategy is associated with geographical expansion, where currently the focus is on Europe and the Middle East, where we are now represented in 22 countries, either directly or through distributors. And of course, our work also to further expand in the Asia Pacific region and particularly, the work that we're undertaking in Japan and now beginning to embark on market entry into China. The third component of our priorities, of course, is on product expansion, where we continue to invest significantly in R&D to deliver new products like the recently launched AuditPro platform, plus future products like our CORIS new technology platform for endoscope cleaning, which I will talk to shortly. And finally, to enable these first 3 priorities, our fourth focus is to invest for growth. There is a significant opportunity, not only for trophon, for AuditPro and the CORIS technology, but in the broader infection prevention market, and your company is certainly in a good position to continue to invest in these growth opportunities. So I'd like to spend a few moments to provide a bit more detail on the growth opportunity for trophon. And first of all, I think it's important to understand that the requirement for high-level disinfection of ultrasound probes is large, it's very large. The opportunity involves many different types of probes associated with over 150 different types of ultrasound procedures. And these procedures include endocavitary procedures, ultrasound-guided biopsies, ultrasound used intraoperatively, ultrasound used to scan wounds, just to name a few. And what dictates the requirements for high-level disinfection is a classification called the Spaulding classification. And according to this classification, any probe that can come into contact with bodily fluids, mucous membranes, broken skin, blood, et cetera, must be disinfected prior to reuse. You would like to think so. As a result, there's a significant global market opportunity for trophon devices as ultrasound is used on many procedures across many departments within the hospital system as well as private practice. And looking at that or translating that into a total addressable market, or TAM, for trophon, for many years, we have quoted a 40,000-unit addressable market for trophons in North America. However, over that time, ultrasound hasn't stood still and it has grown significantly. And during the year, we did conduct research on the North American market to get a better understanding of the TAM as a result of the estimated total addressable market for trophon units in America, and revised it up from 40,000 units to 60,000 units. And this takes into account the growth in the ultrasound market over the last 8 to 10 years in the U.S.A. And importantly, what this means is that there is still a significant opportunity for a strong growth of our trophon franchise in North America. At this stage, we have not needed to undertake similar exercise for EMEA and Asia Pacific because of the degree of penetration that's there in those markets currently. We do acknowledge, however, that the estimated 40,000 unit opportunity in each of these regions is somewhat out of date and is, therefore, likely higher as ultrasound has grown in those markets definitely as well. And it is worth reminding ourselves of the value that trophon brings to patients. And when you think of the current global installed base, what that actually means is up to 22 million to 23 million patients per year are protected from the risk of cross contamination because the ultrasound probe that was used in their medical procedure has been disinfected using the trophon technology. Another important aspect related to the significant growth opportunity for trophon is the opportunity to upgrade our customers' trophon fleets from the older trophon EPR to the trophon2, which, of course, offers a range of significant benefits for our customers. For obvious reasons, upgrades were not a big focus in FY '21 because of the restrictions on hospital access, et cetera. However, as we move into FY '22, we are placing a greater focus on this opportunity. And there are now over 6,500 or so EPR units that are 7 years or older in the market and customers have been notified about the end of life for the original EPR as part of the product life cycle. So in summary, when you consider the increased total addressable market for trophon units in North America, the EMEA growth being experienced as well as the fundamentals for adoption improving there. The opportunities presented through our geographic expansion in EMEA and Asia Pacific, the potential for increased usage of each trophon due to a wide range of ultrasound procedures and of course, upgrades to our trophon EPR fleet, there is definitely a significant opportunity for the trophon business moving forward. So a few words on geographical expansion activities. It's very, very pleasing to see the expansion of guidelines across the European and Middle East region where numerous markets now recommend high-level disinfection of ultrasound transducers, with many of them advocating that this should be done using automated and validated mechanisms of which trophon, of course, leads the way. We continue to invest in and grow our footprint in Europe. We are now represented in 22 countries, either direct or through distribution partners. And in FY '21, we saw the installed base in the region growth, 35% over FY '20. So some very encouraging signs for the European region. We've also increased our efforts in the Asia Pacific region to bring new markets online, in particular, our focus on the untapped potential in Japan, China and across the ASEAN countries. And despite the challenges associated with Japan being in a state of emergency for the majority of the year and actually just left us in the last month or so, we did continue our market development work with virtual education and training with relevant specialists and societies and of course, our distributors in Japan. In addition, we did expand our local infrastructure in Japan to support ongoing market development activities in partnership with our distributors, including GE Healthcare. We have also registered a wholly-owned foreign enterprise in China and are now preparing for regulatory submission for approval of trophon to for commercialization in that market. We've also recently received regulatory approval in Malaysia, Indonesia, Thailand and the Philippines and are currently working on establishing a distribution network in those countries as well. So moving on to product expansion, our third pillar of growth. And during FY '21, we continue to invest in our product expansion strategy. The R&D investment increased 11% to $17.2 million, which is a significant percentage of our overall revenue. And that was directed across multiple projects. And one of those you saw launched in June, where we announced the launch of the Nanosonics AuditPro, which is an infection control workflow compliance management system. And it is the result of a number of years of research and development, and it does open up a significant opportunity to market a unique solution that integrates infection prevention decision-making, together with track and trace and compliance into a single digital solution. And the new AuditPro digital solution, it comprises of a mobile scanning device coupled with a subscription to a browser-based application for users. And the first application focuses on ultrasound procedures with the new handheld device scanning designed to be coupled with every ultrasound console as point of care. And with over 270,000 ultrasound units in the United States alone, the AuditPro does represent a significant new opportunity for the company. The product has recently launched in North America with very positive customer feedback and the pipeline is certainly growing strongly. And in speaking with our regional president for North America last night, he tells me that one of the top 10 luminary hospitals in North America has just gone live with AuditPro, which is fantastic news. And plans are certainly in place to launch in a number of European markets as well as ANZ early in the new calendar year. It's probably worth mentioning as well that while AuditPro is a discrete new product platform, its application for ultrasound and connectivity with trophon2 that further enhances the trophon2 value proposition. This further supports the leading position and ongoing adoption of trophon2 as well as the potential to support upgrades from the trophon EPR to trophon2. And in addition, through its educational platform, it can also guide clinicians on which ultrasound procedures require high-level disinfection of the probe. And then therefore, there's the potential for AuditPro to drive compliance across all required ultrasound procedures and consequently increase usage of the hospitals' trophon devices. So really an exciting new platform for the organization to introduce. Of course, there is more in the R&D area, and there is a very exciting new technology platform and to come. And our next new technology platform is called Nanosonics CORIS. And this new technology platform is directed at solving what is probably one of the most important and significant problems in instrument reprocessing today, and that's the cleaning of flexible endoscopes. Indeed, more healthcare-associated outbreaks have been linked to contaminated endoscopes than any other medical device. And it's a highly complex problem to solve that has existed for many, many years. So a bit of detail around this, if I may. First of all, reusable flexible endoscopes. They're highly sophisticated medical devices that enable advanced diagnostic and therapeutic interventions across a range of conditions. And reusable endoscopes, they incorporate advanced technology that gives physicians a sophisticated level of control in carrying out what are complex minimally invasive procedures while navigating challenging anatomical situations to deliver the highest level of patient care. And there are many different types of flexible endoscopes, including colonoscopes, gastroscopes, duodenoscopes, bronchoscopes, urological scopes and the ENT scopes as well as a number of other specialty scopes. And one of the things these scopes having in common is they all have ports and complex channels. There are many well-documented instances of infection outbreaks and reprocessing issues across the whole range of these scope types indicating a very significant unmet need and an opportunity for Nanosonics to address. And the cleaning stage of the reprocessing of process, that's a critical step, and it has significant implications for the outcomes of the subsequent high-level disinfection stage of the process. Indeed, the same goals that you can clean without disinfecting, but you cannot disinfect without cleaning. And this is a great example of that. And the challenges associated with manual cleaning combined with reports of persistent contamination from biofilm, it's a well-recognized problem by the regulators and customers. And addressing this problem, it is a very complex issue that has existed for many years. And there are many, many challenges to overcome, including: trying to automate what today has anywhere between 50 and 200 manual cleaning steps; you have to deal with sophisticated endoscope design and internal architectures with multiple interconnected channels and complex ports; there are challenges with effectively cleaning channels with diameters that can be less than 1 millimeter and challenges with removing complex difficult soils such as biofilm. So as you can imagine, it's a very complex technology development program we have undertaken. But the Nanosonics R&D team, they have focused on these significant technical challenges for a number of years now with the aim of developing a novel automated technology designed to really revolutionize the cleaning process of flexible endoscopes. And our new Nanosonics CORIS platform, it is very, very different technologically to trophon. So it's not using the trophon IP. It's a totally new platform. But like trophon, it will comprise both capital equipment and consumables. And in our testing to date, this new automated technology has demonstrated the ability to deliver significant superiority in cleaning efficacy over the requirements of the current standards, including actually the most recent standards that are even stricter. In addition, the testing demonstrates superior efficacy over manual cleaning also against difficult biofilm contamination, which is probably the biggest issue, including in the smallest channels of an endoscope. So the potential to address, as you can imagine, the challenges of contaminated endoscopes represents a significant opportunity for Nanosonics. There are over 60 million flexible endoscopes procedures being conducted across the United States and the largest 5 markets in Europe alone every year, and that number is growing at approximately 6% or so per annum. And we are very, very pleased with our progress in the product development. There's still some more development work to do, which will be followed by external clinical assessment to support the regulatory submissions, and we are currently targeting the first commercial launch in calendar 2023. So needless to say, it's a very exciting development, and we remain very, very confident in bringing what we believe will be a transformational product to market. That does address a significant unmet need and like trophon can become a new standard of care. So all around some very exciting things ahead for the business. So moving on to this financial year which really is a continued growth outlook position. The outlook presented in August in our FY '21 full year results, that has not changed. While acknowledging the ongoing uncertainties associated with COVID-19, assuming that the positive market recovery trends continue, then the company anticipates a return to double-digit growth in total revenue in FY '22. This growth is anticipated to be driven by an ongoing increase in installed base globally and increase usage of consumables across all regions, resulting from the installed base growth as well as ultrasound procedures returning to pre-COVID-19 levels. For FY '22, our expectation is that overall gross margin will be in the order of 75%. It's worth noting that in FY '21, the gross margin was actually 78%. And this reduction is primarily due to the anticipated change in the mix between capital and consumables and service revenues as the installed base increases at a faster rate than last year as well as we expect further increased capital revenue from upgrades in FY '22 over FY '21. And so -- but whilst this reduction in gross margin is short term, it's actually a positive indicator of growth in the longer term as it is primarily being driven by a faster growth in the installed base, which consequently then results in a faster growth in annuity revenue from consumables and service over time. It's also worth noting that all organizations are currently faced with complexities in the global supply chain, in particular, the supply of electronics. Our operations team are effectively managing these current complexities. And while we do not currently foresee any problems, it is something that has to be managed very closely. In addition, global freight has also become very complex and also has to be carefully managed. There are impacts of freight costs on COGS. However, we expect our gross profit margin to still be in that 75% range for the year. So the operations team are certainly managing these complex issues very well at the moment. So with the exciting growth opportunities outlined for the trophon, with AuditPro, with -- and CORIS franchises as well as further opportunities in the broader infection prevention market. The company maintains its commitment to continue to invest in long-term strategic growth agenda, with an emphasis on continuing investment growth in our regional operations and across our research and development. Our operating expense guidance of $90 million for the year, that remains, and we are currently tracking to that guidance after the first 4 months of operations in FY '22. A couple of comments on the trading for the first quarter of FY '22. Market conditions have certainly improved in -- particularly in North America. Globally, revenue for the first quarter of FY '22 was in line with our internal budgets and marginally ahead of the third quarter of FY '21 where we saw a significant market recovery. It's probably worth mentioning why we compare the first quarter to the third quarter of FY '22 versus the traditional versus PCP, remember, if we were comparing it to PCP, then there'll be significant growth the very first quarter of FY '21, the market was depleted because of COVID. However, because we saw the strong recovery in the second half, we believe it's more structural to actually compare the first quarter this year with the third quarter of last June. So new installed base in the first quarter was actually up 8% in the third quarter of FY '21, which is a very positive trend and again, in line with our expectations. Upgrades, they are also beginning to gain traction with approximately 170 units upgraded in North America in the first quarter compared with 60 units in the third quarter of FY '21. So that's beginning to kick in and go well. Sales of consumables to end user customers are also in line with our budget. First quarter sales are marginally ahead of the third quarter of FY '21. That's indicating the positive return to pre-COVID ultrasound procedure volumes. There were a number of states in North America. And particularly in the Southeast, impacted more than others by the Delta variant of COVID-19 putting pressure on hospitals and therefore, sales of consumables in those states were marginally down. However, the first quarter sales overall of consumables in North America were marginally up versus Q3 of FY '21. And as the half progresses, we're certainly seeing an improving trend in those states that were most impacted. So I would like to end by acknowledging all the infection preventionists and frontline workers globally for their tireless efforts and ongoing efforts in managing the COVID-19 pandemic. I would also like to acknowledge each Nanosonics employee around the world for their resilience, their flexibility, dedication and customer focus as we continue to work on the mission of the organization. And finally, I'd like to thank you all, our shareholders, for your commitment and belief in the organization. Nanosonics is a great organization, delivering on a very important mission. And I certainly appreciate the trust and confidence you all place in the Board, management and every employee to deliver on our long-term growth agenda. Thank you very much, and I will now hand back to our Chairman, Maurie Stang.

Thank you, Michael, for your update. Just before we move on to the formal part of the agenda. I'd also like to just recognize some important movements in the Nanosonics journey. We have, for some time, shared building with Cochlear. Cochlear has been very, very supportive. But now we see in 2022 a move to a largely custom dedicated facility in every aspect of the business. It reflects our vision for the future. And finally, I also want to recognize that this Board is proactive in every element of the company's business. And I just want to thank my fellow directors because it has been really a very, very positive and continues to be a very supportive agenda of innovation for this great company. I'll now move to the formal business of the meeting. The notice of this meeting was circulated to shareholders, and copies are available on Nanosonics website. I propose that the notice be taken as read. I will now outline the procedure for this part of the meeting. The resolution and the proxy votes will be shown on the screen. As I mentioned, voting on each of these resolutions we put by poll using the voting functionality described. You may either cast your vote. At this time, the resolution as read or complete voting on all resolutions after I've read all the resolutions, and we have concluded answering questions on these resolutions. I'll then provide a warning that the poll is about to close. As Chairman, I've been given a number of undirected proxies, and I'll vote these in favor of each resolution in the poll. Questions may be submitted at any time whilst the resolutions are read using the functionality previously described. Questions will be considered and answered at the end after all resolutions have been read. I'll now turn to the first item of ordinary business, which is, to receive and consider the company's reports for the year ended 30th of June 2021. No formal vote is required on this item of business. If there are any questions, I'll address those after the resolutions have been read. In relation to resolutions 1 and 2, being the reelection of Dr. David Fisher and Mr. Wilson, we have previously submitted -- who have previously submitted themselves to reelection. I'll say a few words to introduce them in support of the resolutions for their reelection. Resolution 1 concerns the reelection of a Director, Dr. David Fisher. David was first appointed to the Board in July 2021. And this resolution seeks shareholder approval of his reappointment. I'd now like to invite David to say a few words in respect of resolution 1.

Thank you, Maurie, and good morning, ladies and gentlemen. Let me correct, Maurie. I was appointed in 2001, not 2021. So as you can see, I'm a bit older than that, but thank you for your introduction. This morning, I'm seeking your support for my reelection as an Independent Non-Executive Director of the company. I've been involved in the health care biotech and venture capital business for there, I say, 35 years or more, both here and overseas. I'm a founding partner of Brandon Capital Partners, which is a leading Australian venture capital provider. And previously, I've spent time overseas and here in the biotech and medical device sector some time that was in Sweden with Pharmacia and a CEO of a startup called many years ago. I certainly enjoy my operational and investment experience as I contribute that to the development of the company's strategic growth agenda, both in the global expansion of its existing products as well as identification and development and commercialization of new products, a bit of which you've heard from Michael this morning. I'm fortunate to be able to bring my full focus to the company, as I do not currently hold any other list of directorships other than the Board of Nanosonics. In addition, I now spend a small amount of time with as that's a young man's game, and the team are doing a fantastic job and don't need my full-time commitment. I joined the Board, as I just said, in Nanosonics in 2001 as a start-up company when we provided the first initial seed capital for its establishment. As a Board member, I've had tremendous satisfaction in seeing the company grow into the global enterprise that you are witnessing today. I feel, as every year, I can comfortably say that Nanosonics has reached an important and exciting stage, and this year is no different, as you've heard from both Maurie and Michael. There are so many opportunities both with the existing products portfolio, existing markets as well as new products going into new markets. Thank you for affording me the opportunity to address you from our reelection. I would be honored to continue on the Board and help the management team continue the growth agenda that it's undertaking. And as importantly, development of new products in health care solutions to support the international community in which we operate and serve. Thank you very much.

Thank you, David. And I want to reinforce how much we appreciate David's contribution to our journey and success. The resolution and the proxies received for resolution 1 are shown on the screen. And indeed, they speak for themselves. We'll move on to our next resolution. Resolution 2 concerns the reelection of another director, Mr. Geoff Wilson. Geoff was first appointed to the Board in July 2019, and this resolution seeks shareholder approval of his reappointment. Now I'd like to invite Geoff to say a few words in respect of resolution 2.

Thank you, Chairman, and good morning, ladies and gentlemen. This morning, I'm seeking your support for reelection as Independent Non-Executive Director of our company. I joined the Nanosonics Board in July 2019. And shortly after joining the Board was asked to Chair the Audit and Risk Committee. And also a member of the Remuneration and People Committee. I also serve on the Board of Toll, HSBC Bank Australia, Future Generation Global Investments and Chair the Board of the City Symphony Orchestra. The experience I bring to Nanosonics is drawn from my executive leadership and Director experience. In particular, I have spent over 30 years with KPMG in Australia, including 3 years in Silicon Valley and 4 years in Hong Kong. I believe that experience in finance, audit and risk management enables me to assist the company to leverage its market opportunities in key markets such as those across Asia Pacific and North America. I'm fortunate to have held a number of senior leadership and operational roles at KPMG. This, combined with my work with public and private boards, have provided me with a range of skills to assist and scale technology businesses, the development and commercialization of new products and mentor management teams as they lead their businesses. By working in financial services and as a Director has provided me with good insight into effective governance, which I seek to implement as Chair of the Audit and Risk Committee as well as with the Board. The company is at a very exciting stage in its development, and there are many opportunities across the markets in which Nanosonics operates. I feel I am well placed to assist business to scale appropriately and leverage its strengths in order to capitalize on those opportunities. Thank you for affording me the opportunity to address you for my reelection. I'm energized by the opportunity to be reelected to the Nanosonics Board, where, if we reelected, together with my Board colleagues and our management team, I will be focused on serving the shareholders, customers, employees, communities in which we operate to deliver great health care outcomes through transformative technology. Thank you very much.

Geoff, thank you. And since Geoff has joined the Board, he has been extremely proactive and is already having a big impact on a number of our initiatives and, of course, the overall governance. So thank you, Geoff. The resolution -- the proxies received for resolution 2 are shown on the screen. And once again, they speak for themselves. We'll now move on to the next resolution. Resolution 3, the remuneration report is required to be considered for adoption in accordance with the Corporations Act. The remuneration report forms a part of the Director's report and appears on Pages 38 to 57 of the 2021 Annual Report. The vote on this resolution is advisory only and nonbinding. The resolution gives the new members the opportunity to ask questions or make comments concerning the remuneration report during the meeting. The Chairman of the meeting, other directors, other key management, personnel or any of their closely related parties would not be included in the votes for the resolution. Where in my capacity as Chairman, I'm holding undirected proxies and the appointor has authorized the Chair to vote the undirected proxies on this resolution, I will be voting in favor. The resolution and the proxies received for resolution 3 are shown on the screen. We'll now move on to the next resolution. Resolutions 4 and 5 concern the proposed issue of performance rights and share appreciation rights to Executive Director, Michael Kavanagh, as part of his remuneration package. Any votes cast in favor of these resolutions by Michael Kavanagh and his associates will be disregarded. In addition, we're the Chairman of the meeting. Other directors or other key management personnel or any of their closely related parties hold undirected proxies, these proxies will not be included in the votes for the resolutions. We're in my capacity as Chairman, I'm holding undirected proxies and the appointor has authorized the Chair to vote undirected proxies on these resolutions I will be voting in favor. Resolution 4 concerns the issue of 3,010 performance rights to the Chief Executive Officer and President, Michael Kavanagh, under the 2021 short-term incentive plan. The resolution and the proxies received for resolution 4 are shown on the screen. We'll now move on to the next resolution. Resolution 5 concerns the issue of 190,040 -- 190,114 share appreciation rights and 132,760 performance rights to the Chief Executive and President, Mr. Michael Kavanagh, under the 2021 long-term incentive. The resolution of the proxies received for resolution 5 are shown on the screen. We'll now move on to the next resolution. Resolution 6 concerns the adoption of a new constitution for the company. The company's current constitution has been in place since around 2005. And the new constitution sees this document refreshed to current -- to reflect current practices. Since the notice of meeting was issued, the company has clarified that it is the company's intention to provide shareholders the ability to attend meetings in person potentially in conjunction with the option to attend using virtual meeting technology. And of course, we will respond to the opportunities and challenges of the times we're in. The special resolution of the proxies received for resolution 6 are shown on the screen. Resolution 7 concerns the adoption of a proportional takeover provision in the constitution. A special resolution and the proxies received for resolution 7 are shown on the screen. I'll now pause for a few moments to provide shareholders with an opportunity to ask any questions in respect of any of the 7 resolutions and finalize their voting. Since there appear to be no questions, I will move on to the voting. The poll will be closing shortly. Before it does, I'll now provide shareholders with a few moments to finalize their votes. The formal business is now completed, and I declare the poll closed. Results of the poll will be announced to the ASX in due course. We now move on to questions.

We have received some questions to date, and many of them being answers in the materials provided today. I would now like to invite general questions about the business. [Operator Instructions] So the first question, I'll pass on to Michael Kavanagh.

So there's a question in from Mr. Claude Walker, and Mr. Walker would like to understand the situation with respect to our patent expiry dates with respect to the trophon technology and how the company is actually managing that. I would say that the company -- the majority of the patents that we have and relevant patents that we have across the trophon technology, the technology itself as well as the consumables, go out to about 2031. In addition to that, so there's still quite a period of time before we have any patent expiry. And it's important also to note that it's a system. It's all the patents together that make up the system. So we're quite well protected. But in that time period as well, there is a body of work where we expect to introduce some new patents to protect new generations of the trophon devices as well as they come to the fore.

I think just to add to that, we've also invested substantially in internal capacity as well as the traditional external capacity we've had on IP. It's a big part of Nanosonics' journey and focus and there's a lot more to come.

Yes with internal IP lawyers that are now part of the group.

The next question is from the [indiscernible] super fund. And the question is, does CORIS use ultrasound? I'll hand over to Michael for that question.

I think the -- it depends on how this question is actually interpreted. And that's -- if it's meant as does the CORIS technology have applications in ultrasound? Well, no. Not really. This is a specific technology that is associated with flexible endoscopes, or indeed, any medical device that has channels, in particular. So it could potentially over time go beyond endoscopes. If the technology is associated with the mechanism of action associated with CORIS, we've, over many years, as I did say in my address, it's a very complex program or a challenge to solve. And over the years, we have tried many different types of mechanisms to effectively address the situation. But we have not gone to market, and we have got patents across many different types of ways of potentially doing it. But we've not actually disclosed to the market the specific mechanism of action of the CORIS technology at this stage.

Watch this space. The next question is from Mr. Scott Fielding. Do you see the take-up of trophon improving as countries open back up, Michael?

I think what you saw in the second half of last year, as the markets did improve with -- and access by our field force into hospitals, et cetera. But then you saw a significant increase in the installed base. As I mentioned, there was a 20% increase in the installed base in the second half over the first half. We certainly anticipate, as we said in our outlook statement for FY '22, that we expect to see now continued growth in the installed base as those markets conditions have improved. And that growth should be across North America as well as the European and other markets.

Thanks, Michael. A couple that was sent in by shareholders that I just want to touch on. The first one relates to our position on virtual versus hybrid versus face-to-face shareholder meetings and AGMs. We, of course, prefer the traditional approach, and we'll be working hard to implement that wherever possible. But in all cases, we will use the best combination of technologies and personal interaction that is available to us. The second question was regarding our capital management. Both Michael and I have addressed that previously. It's clear that the company has strong cash reserves, but it also has a very significant ambition. And we reiterate our belief that the company's opportunities are such that we believe that at this time, it's best to keep our resources in place and monitor that on an ongoing basis. This is what you've heard before. But with CORIS, our new headquarters and other expansion that we're undertaking, I think this is a prudent move, particularly in uncertain times. Mr. Scott Fielding, do you see sterilizing products like trophon being used in dental labs as opposed to just hospitals? Before I go over to Michael, I'd want to make it really clear, and we've made this since day 1, trophon is exceptional technology and platform. But we are an infection prevention company, and we're looking at every dimension of infection prevention. So the question is, whilst trophon itself may not be the platform, as most of you know, I'm heavily involved in the dental industry, we have significant opportunities to support that industry. Michael, any further comments on?

I think you've answered the question, Maurie. Certainly, the core technology in trophon could potentially have applications down the line in the dental industry. Of course, there needs to be a significant unmet need and it very well may be that it's other technologies that we look to develop may be more applicable to the dental field rather than trophon itself. But we are -- it is an important question with respect to looking at broader expanded indications for the trophon technology. And in other words, what else could go in trophon or trophon2, and that's certainly something that the company is assessing.

I'll leave that one to you, Michael.

There was a question in here from Mr. and Mrs. Shah. Just curious to know why the trading updates, the comparison between the first quarter of FY '22 and the third quarter of FY '21. Shouldn't the comparison be versus pcp? And I think I mentioned that in my address that certainly convention would have you compare the first quarter to pcp. But as I mentioned, the first quarter of FY '21 was a quarter where the organization and, quite frankly, the world was experiencing difficulties associated with the COVID-19. So the actual revenue and installed base, et cetera, were more depressed in that quarter. So we thought it was far more instructive to actually compare the first quarter to the first quarter of the second half where the market had recovered, which gives a much, much better indication and a much better comparison in our view as with respect to the future direction of the organization or performance of the organization.

We'll give it another moment or two to see if there's any further questions. So this does conclude the formal -- the business of this meeting. I do declare the meeting closed. I thank our shareholders, our team, our customers for their incredible support. And I look forward to whatever the new normal is and Nanosonics' contribution to that on a global basis. Thank you very much.

Thank you.