Nanosonics Limited (NAN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nanosonics Limited 2023 Half Year Results. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Kawana, Managing Director and CEO. Please go ahead.

Thank you very much, and a very good morning, everybody, and thank you all for joining our call. I understand that today is quite a busy day out in the market. I'm joined here by McGregor Grant, our CFO. Well, this morning, you will all have seen, we released all the details around our half year results for this financial year, which really confirmed the numbers in the trading update that we provided on the 19th of January, including, of course, the upgrade of our guidance for the full year. Overall, I think we're very pleased with the performance of the business in the first half with significant progress, as you have seen, both financially and operationally. And importantly, also, when you break down the half into the 2 quarters, we saw good growth momentum emerging between the first and second quarter. As usual, we have provided a lot of granular detail, especially in the investor presentation, breaking everything down by region, by quarter, our total units revenue down into capital, consumables, et cetera. So pretty much most of the information is in there. But for me, there were really, I think, 3 key takeaway messages that I'd like to leave. And the first takeaway is that the transition to a largely direct operation in North America is now effectively complete. It has been successful and the anticipated benefits from that change are certainly coming to fruition. And this was especially evident in the second quarter as the transition was finalized from a customer onboarding perspective. And of course, the expansion of our local infrastructure was completed and became fully operational. And indeed, on the back of that, we saw good overall growth momentum between the first and second half, not just in North America but across the business. The second takeaway is as total revenue is growing where it was up 35% in the first half to $81.6 million. Together with improved gross profit margins, we are getting more operating leverage in our underlying trophon business. Indeed, in our business in North America, it's generating between 55% and 60% operating profit before headquarter costs are allocated. There is, of course, significant opportunity for ongoing growth. And while we intend to continue to invest to realize those opportunities, we do also expect to see ongoing growth in our operating leverage for our underlying business moving forward. And the third takeaway message for me really is we remain very excited about the opportunity with our next transformational product, Corus. And more details about the product can be found in the investor presentation, including images of the product for the first time as well as details of the excellent efficacy results it's achieving. And this product truly does address one of the most significant issues in instrument reprocessing today, which, of course, is centers around endoscope cleaning, where we believe there is a significant unmet need and the fundamentals for adoption are strong because they already exist guidelines and requirements in all major markets around the cleaning and reprocessing of these endoscopes. During the half, a number of planned activities with Corus were delayed at this primarily the cost of some supply issues with a number of custom components that are specifically designed for Corus. This was mainly out of some of the suppliers we have in China on certain components where there were over related lockdowns, of course, in the half, and then that was followed by the Chinese New Year. This did put some of our activities behind this, but that being said, assuming that the supply chain risks can be managed, which they currently are, we continue to target, as we've said before, progressive market introductions aligned with regulatory approvals. And our aim is the first market introduction will likely be in Australia and/or Europe towards the end of the calendar year. So they're really the 3 key takeaways, but I'll touch on some of the other highlights for the first half and then hand over for questions. As always, first of all, the installed base. Globally, the installed base reached now 31,120 units out there at the end of December. So that's up 4% in the last 6 months and 11% in the last 12 months. In North America, there were 1,110 new installed base units placed in the first half. As mentioned earlier, when you break down the half, we saw good growth momentum emerging between the first and the second quarter, and this was certainly the case in North America, where just over 60% of the new IV were actually placed in the second quarter as the transition to the large indirect sales model completed. So that's 680 units in Q2, which on an annualized basis is getting the run rate approaching the 2,800 to 3,000 new IB units per annum that we are targeting as we enter FY '24. Our direct team, they continue to collaborate with all the OEMs. And some of those new IB units were referred by or sold through some of the ultrasound OEMs. The majority of the demand, however, and the sales for the new IB units is and continues to be generated by our expanded direct team. In Europe, just as other companies have reported, the market environment there does remain challenging and really associated with still some COVID-related hospital staff issues, NHS pressures in the U.K. and general inflationary pressures. A total of 8 new IB units were placed in the half, which was down on PCP. However, like the U.S., the Q2 was a lot stronger with actually 75% of the new units placed in Q2. And we do expect growth momentum to continue now into H2. We're already seeing that into Q3, and we remain optimistic about the overall growth opportunity in Europe, whilst, of course, remaining somewhat cautious under the current market environment, but Q3 so far is looking good. In Asia Pacific, the installed base, it grew 4% in the half, with 80 units placed. Now that's growing the total IB to just under 2,000 units in Asia Pacific. The majority of this NIB were placed in ANZ, there were some units in Japan. In Japan, our efforts continue through our medical affairs program, engaging with opinion leaders and societies as we work together on developing new standards and guidelines for high level disinfection. And in China, the local authorities testing of 112 is nearing completion. Actually, I've just learned, it has been completed with the product passing all tests that are required. So net plans now in place to pull together the submission for regulatory approval. On upgrades, as you know, there is a significant opportunity for upgrades, and we're now seeing good growth, especially on the back of the transition in North America, where we now manage all the customers. And in total, there were 800 upgrades in the half, which was up 100% on the prior corresponding period. And like the new IP, we also saw good growth momentum in Q2 over Q1 with 68 70% of the upgrades actually placed in Q2 and detailed by region on all the IB and upgrades can be found in the investor presentation. So when you combine our new installed base and upgrades, there was an overall increase of 14% in total units placed in the half versus prior corresponding period. So overall, a good result for our capital equipment volumes. On the revenue side, overall, revenue was up 35% to $81.6 million or 27% in constant currency. Breaking that down, the capital revenue that was just under $26 million, and that was up 36% versus PCP. And the consumables and service revenue, just under $56 million was up 34% versus PCP. And the key contributors to revenue growth when we look at it is, obviously, growth in total units placed, that's both new installed base and upgrades. And as already mentioned, total units placed were up 14%. There was increased consumable volumes as the new installed base continues to grow and -- but also as also some procedures return now to pre-COVID-19 levels. There was certainly favorable pricing on both capital and consumables, especially in North America with the shift from distributor pricing to customer pricing as a result of the transition to the largely direct sales model over there. We also did see increased service revenue. And of course, as there is now a critical mass cell units out in the marketplace, the service can become more prominent and the opportunity is great. And service revenue was actually up 50%, over 50% to just under $ 9 million in the first half. And of course, there was a favorable impact of foreign exchange sourced primarily with the relatively stronger USD. And proportionately, I guess of the 35% growth that we did see approximately 7% was due to the favorable impact of foreign exchange, with the remainder associated with volume and price and each having actually quite a similar impact between volume and price. By region, in North America, the total revenue was up 36%, and that's just over $74 million. And that did include growth in capital revenue of 35%. So we had just over $23 million in capital revenue and of course, growth in consumables revenue, which was up 37% to just under $51 million. In our European region, the total revenue was up 6% in the half to just under $4 million, and capital revenue was up 13% and to just under $1 million in consumables and service revenue up 4%, and it's just under $3 million. And likewise, in Asia Pac, the total revenue was up quite strongly, actually up 31% to just under $4 million. And this was mainly driven by increased capital revenue, which was up 78% versus PCP to $1.6 million, where we had a very good half where we're now seeing more upgrades coming through over last year and of course, continued new IB growth. And with that, the consumables also continues to grow, which was up 10% in the half to $2.2 million. On the gross profit margin for the business, for the half, it was just under 79%, 78.9%. And that was up from just over 76% in the PCP. And this strong result was driven by the favorable capital and consumable pricing in North America. The increased proportion of consumables resulting in strong sales growth in the first half, which was associated really with increases in procedural volumes and the installed base and, of course, the favorable impact of foreign exchange. Those above factors, the capital, the consumables and the FX, they were partially offset by higher freight costs, but still delivering a strong gross profit margin result. And as mentioned in the updated guidance, we are expecting the gross profit margin to be between 77% and 79% for the full year, and that will depend on the mix between capital and consumables, but we are anticipating that we will see more capital in the mix in the second half, especially as upgrades and, of course, continued growth in new installed base comes through. On the operating expenses, for the half, the total $54.5 million. So that's up 28% on PCP or up 14% compared to the prior half. And the primary drivers for increasing operating expenses include, of course, the increased costs in our North American infrastructure supporting the transition. And in the half, we did add probably another 4 or 5 extra head count than we had anticipated, albeit it was in our Indianapolis facility in customer service, just helping manage the volumes of transactions and coal. So we're doing customer service and logistics. Of course, we did have foreign exchange and unfavorable impact of foreign exchange on all our U.S. dollar denominated expenses. We did continue -- shall continue our investments in R&D across our 3 primary areas of ultrasound reprocessing, endoscope processing and our traceability and compliance solutions. And of course, moving to the new headquarters and new manufacturing and R&D facilities come at an increased cost as well. But overall, you would have seen good operating leverage despite the fact that the operating expenses did increase. And when you actually break our operating expenses down, it is important to stress that all the total OpEx, 44%, 45% is actually associated with all the activities and market development and growth out in the region. So it's associated with revenue generating. 25% is associated with product innovation, so future revenue generating. And of course, about 30% associated with the back-office infrastructure, manufacturing, et cetera, to support the regions. So taking all of that together, then we had an operating profit before income tax for the half of $11.4 million, and that was up from $3.3 million in the prior corresponding period. We had positive free cash flow for the half, just over $6 million. And at the end of December, the company had cash and cash equivalents of just under $100 million, so $99.3 million at the end of December. And as you know, we don't have any debt. So -- and at this stage, in terms of that cash, we continue to investigate M&A opportunities as well as potential distribution partnership opportunities. And this cash balance does provide a strong foundation for this should those opportunities arise. A quick comment on inventory because you will see in the accounts that inventory was actually up $2 million versus prior corresponding period to a total of $24.6 million. And the main drivers of this increase are one, continuing to mitigate supply chain risk to ensure continuity of customer supply. And I think we've managed that very well since the emergence of COVID, supply chain has not gone away yet. It certainly is improving, but we continue to mitigate through our inventory holdings. Of course, going direct in North America means we are increasing some of our inventory in North America as well under the new sales model. And the other important component of this is freight and our mode of freight. And here, we are very much managing freight costs by transporting the majority by fee freight. If we were to do so by air freight, it would cost about 2.5x fee freight. So it's more costly. But in addition to do sea freight, -- in addition, on the sea freight, the time actually for sea freight is taking approximately 1 month longer than it used to pre-COVID. And that means we need more units in transit to make sure that we have that continuity of supply out in the regions. So our primary goal is to ensure continuity of supply. But as you can imagine, with the size of our inventory, this is something that is under active management within the company. The -- a few comments because, obviously, over the last 6 months, so a key focus and many of the questions I get are around the North American transition and how it's going, is it being successful. So a few comments on that. And what I can say now is that this transition is now effectively complete. All of the GE customers have been transitioned, account set up, pricing agreements in place, and we're now shipping product to all customers from our facility in Indianapolis. We do have a small number of sub distributors but the majority going through our facility in Indianapolis. The full team is now in place and operational. As I mentioned, we did add a few extra head count over what we initially anticipated, probably about 4% to 5% over what we initially anticipated, but they were mainly in the supply and customer service rules to manage the increased volumes. We have established well over 50 new enterprise agreements with IDNs or integrated delivery networks since we started the transition, and we're now dealing one way or another with the majority of the IDNs in North America. We continue to work with the ultrasound OEMs, including GE, and we have also signed a number of distributors that GE worked on when they were distributing to sell trophon. However, as I mentioned earlier, motor demand is certainly driven through the efforts of our direct teams and most of our sales are through the direct team. And in the second half, we will be expanding our service infrastructure and model in the United States to include field service operations and the cost of debt are included in the updated OpEx guidance. And with many existing customers coming off of service contracts and moving to Trophon 2 with upgrades which are provided by Nanosonics, we see service as a very good opportunity moving forward, not just from a revenue perspective. And as I mentioned, our service revenue was up 51% or 50% in the half. But not just from a revenue perspective, but importantly, making sure we're always very close to the customer so we can continue to provide excellent customer service. Finally, a few comments on Corus and just reiterate what I've already said. And the investor presentation does cover some of the details around Corus, including for the first time, images of the product, which, for some of you, it may remind you all the trophon units, but I can assure you they are totally different technologies. We're just sort of keeping it in the design family. But the Corus technology, of course, does aim to address the limitations of current manual cleaning with a novel mode of action using a proprietary environmentally friendly cleaning agents, that's coupled with an advanced delivery mechanism. It brings a high level of automation to the cleaning process and our efficacy results to date demonstrate it certainly has the ability to set new benchmarks in cleaning efficacy. As you can imagine, there's a lot of activity happening across the organization, a lot of excitement across the organization as we ready for market introduction. We were impacted by some supply issues and a number of unique Corus components, as I mentioned, especially out of China. But we are continuing to manage those slippages on some of those activities. And some of the key milestones for this half include, of course, the in-use clinical study together with a range of other studies that we will be doing. We do continue to engage with the FDA through the SAFR technologies program. I mentioned that on our last call, and that is proving to be beneficial for us, having access to that group in the FDA. The de novo regulatory submission to the FDA is we continue to expect that this year. And of course, this is a global product. And outside of FDA, we expect regulatory registrations in a number of markets to commence. And assuming the supply chain risks are managed, and we do continue, as we said before, to targets or progressive market introductions aligned with those regulatory approvals with the first likely to be in Australia and/or maybe a market in Europe towards the end of the calendar year. So that remains the same. And on the business outlook, we did provide updated guidance on the 19th of January, and that has remained the same. So we now expect total revenue growth of between 36% and 41%, that was previously 20% to 25%. And those adjusted targets for FY '23 assume a U.S. dollar rate of $0.70. The gross profit margin we expect to be between 77% and 79%. And that was previously 75%, 76%. Obviously, we beat that in the first half. And that will be determined by the actual mix between capital and consumables. And of course, operating expenses, we've increased the guidance there to grow between 22% and 27% as we continue to invest. But of course, a couple of percentage points of those operating expenses are associated with some headwinds on FX with our U.S. denominated expenses. But as always, all this guidance as in the announcement is subject to the ongoing uncertainties out in the market where there is variability, of course, in market conditions, COVID related or broader economic or geopolitical uncertainty related. So with that, I will hand over for any questions. Thank you very much.

[Operator Instructions] Your first question comes from the line of David Low from JPMorgan.

Michael, if I could you talk a little bit about the assumptions that you've made in the guidance for the rest of the year. I mean I see the comment on gross margins will come off a little bit because capital will be a bigger proportion. Are you assuming in terms of the installed base growth that you will be back at the run rate that you've talked about to 2,800 plus? And perhaps also if you could touch on upgrades in the same?

Yes. Thanks, Low. The -- we do expect to exit the year in North America back at that run rate. If you look at the quarter 2 numbers we got in installed base in North America, we annualize that, and it's getting close to 2,800 -- it was about 2,700 and something. So we are expecting installed base to get back to those levels. We're also expecting continued growth in upgrades in North America. And just a reminder why we expect the upgrade growth is, a, this is a significant opportunity in the number of units that are out there that are 7 years of age plus. And of course, the majority of those units were with us GE customers that have now been transferred over to Nanosonics. So Nanosonics has access to all these customers for us now to drive the upgrade strategy. In addition to that, the other assumptions are that we will have a stronger second half in Europe. We certainly expect that. And we'll continue to have a good half in Asia Pacific, probably similar to what we had in the first half in Asia Pacific. So overall, with that guidance, I think they are the primary drivers. Obviously, we'll continue to benefit from the pricing that we've now achieved in the first half with the transition that will just flow through into the second half.

Great. And if we could move on to the Corus device. I mean you talked about the clinical trials. Can I even talk a little bit about what's required there. And then in the same breath, if you could touch on the regulatory approval process, how long that's likely to take in these initial markets?

Yes. The clinical trials being a de novo application, some people think that it's a huge clinical trial with major endpoints that are patients related to show decreases in infection rates. That's not the case. The clinical trial is an in-use clinical trial that has to demonstrate the cleaning efficacy over the current mechanisms of cleaning efficacy. So there's no patient end points. It's just a statistical sample size that's required to demonstrate the cleaning efficacy. There are other trials that are not in use trials that we were -- we'll also be doing. So further trials, for example, on Basil. We're working, you'll see in the presentation some comments from a key opinion leader by the name of Michelle Alfa, out of Canada. Michelle is probably recognized as the world's leading authority in biofilm in endoscopy and the problems of biofilm and endoscopy and has actually generated -- published extensively on us also generates various models of growing biofilm in particularly in these small channels. We'll be doing some work with Michelle, showing further data on biofilm in addition to the data we already have, that she's very impressed with. So there's a number of studies that we will be doing like that, that's over and above the in-use clinical study that's required for the submissions. The other studies are as much to back up all the claims with respect to the superiority of the product. Some of those will be done in-house, some of those that will be done in clinic. On the regulatory side, the de novo being a de novo because the reasonable predicate, de novos generally take longer than 510(k)s. The benefits of without guarantee, I should say, but the benefit of participating in the STEP program. And one of the things that you do with the STEP program is a lot of liaison with the FDA to ensure that all the material that you're providing in the de novo application is almost full and complete. So by the time it's going through the review process, then you hopefully have a smoother path through the review process. They don't get guarantees on that, but that's the intention. So a de novo it could take 6, 9, 12 months, it's uncertain. But if you thought about 9 months, that wouldn't be a bad idea. The other regulatory jurisdictions are less onerous. We would still require that in clinical data, but the degree of documentation that we require is a little bit less onerous, but one way or another, we'll have all the documentation for the de novo and that will be leveraged in the other jurisdictions where the process of getting that review is a lot faster.

Your next question comes from Lyanne Harrison from Bank of America.

Can I start with what you saw in that first quarter. So obviously, the new installations was lower and understandably because of higher COVID volumes. We had COVID base through that period across, I guess, all geographies. But what confidence do you have now with, I guess, hospital systems and hospital protocol that Nanosonics can manage through that alongside hospitals so that we don't have that sort of impact because we're still likely to get COVID interrupt operations going forward?

Yes, that's a great question, Lyanne. And I think the -- there certainly continues to be uncertainty. In the first quarter, it was especially in the United States, it wasn't just covert related impacts. We were still in the throes of the transition. So a lot of the sales force actually, in some cases, where they want to use the word distracted, but they were helping out the transition of existing customers, which then reduced a bit of their time in terms of driving the new sales. But as we moved into the second quarter, and that transition was done, well, then they were back 100% focused on the core jobs. And we saw that then coming through in the second quarter in the United States. And based on the numbers -- and remember, those salespeople are doing both upgrades and new installed base. So on a total unit from a productivity perspective, they're actually doing quite well. Obviously, we want both and getting the balance between both is really important, and that's something our regional president in North America is continuously and our head of sales continuously looking at. So -- and the numbers as we're going into this third quarter, and we're a few weeks into the third quarter, give us a degree of confidence. But Europe has a little bit more uncertainty I think that many companies have reported that. In the U.K., I was spent a couple of weeks over there visiting many centers and actually experienced myself firsthand meetings being canceled in the morning of a meeting because people were off because of COVID. I happened to be there at the time of all the strikes that were happening, et cetera. So there's a lot of upheaval within the NHS. But that being said, when I was in the hospitals, the employees are doing a stellar job in managing through, but there is -- there certainly are disruptions. Now again, we saw in the second quarter in Europe, the numbers coming through. And as we're moving into the third quarter, we're feeling quite decent about that as well. But we're feeling good about it, but at the same time, I'm remaining cautious about it just based on the environment over there. But we certainly feel confident in the ability that the second half will be stronger than the first half in Europe.

Okay. And then first can you move on to upgrades. So that calculation, about 5% of the installed base was replaced in the last 12 months. So in terms of driving that, I guess, upgrade percentage higher, what needs to be done? Is it about just sales force spending more time or is it convincing customers that the replacement is required. What's, I guess, the biggest driver to get that from 5% upwards towards 10%?

Yes. I mean the upgrade opportunity, really, you look at the cohort that is 7 years of age, plus rather than the total installed base. So we're probably close to about 10% of the, let's call it, the target segment for upgrades because there's probably about 9,000 units over there. Well, actually, in fact, we're probably a bit more because it was 800 in this last half, but we had done more in the last year as well. The -- and both what you described, it's just about spending time. It's just that it's been on front for the customers, demonstrating, getting it into the budget cycle and people seeing the benefits. Of course, for those aged units, in addition to the value proposition of the feature set of the device, you have -- there's an economic argument as well because if they're on a service contract, well, then -- it's almost like the cost of that service contract is discounted immediately because it comes with a 12-month guarantee warranty. So it really is about getting on front of these customers and spending the time. Now in doing that, our new IB, a large percentage of our new IB is coming from what we talked about going deep within hospitals. So going into departments in hospitals that don't have trophon where there are other departments in the same hospitals that do have trophon. So whilst we're in doing that, at the same time, those sales force are visiting depending on the age of those devices, those departments that already have trophons and where there is an opportunity for upgrades. We try and couple that with new IB as well. And there have been many cases where the sales that have been made. It has been new IB and upgrades coming from the same center. But it's just people on front of people.

And one last question from me is on consumables. So with devices, you spoke about quarter-on-quarter growth. Can you shed some color on what you're seeing on consumables through first and second quarter and what you're seeing to date in third quarter?

I think the run rate that we're seeing with consumables now because a lot of the growth in consumables, it has volume growth that it brought us back to pre-COVID levels as essentially in the United States. And then there's obviously, there's some pricing benefits that are coming through on consumables. I think the growth in consumables moving forward now because those prices are baked in, the growth in consumables now will be almost directly correlated with the growth in new installed base moving forward. Certainly, as we're out there and our clinical applications force are out there with customers and educating there may be in some departments of all apartments and opportunity through education that the utility of existing units that could improve. But I would say that the primary driver on consumables growth moving forward will be associated with new IB.

Your next question comes from the line of Josh Kannourakis from Barrenjoey.

A few questions for me. Firstly, just on the pricing benefits and apologies if I missed this earlier on. So should we be recognizing that the full pricing benefit was witnessed in the first half? Or is there any incremental sort of uplift that comes through as those benefits effectively annualized?

Yes. Look, I think the full pricing benefit now to is probably recognized in the first half. We've -- I mentioned that as part of the transition, we entered into pretty much greater than 50 or so enterprise agreements and pricing agreements. We've done all the pricing agreements with existing customers, et cetera. So I think that the full pricing benefits are associated with what you've seen in the first half.

Perfect. And then just on guidance as well. So the $0.70 cross rate, I guess, currency assumptions, you might have mentioned this as well, but is that just for the sort of second half? Or is that for the -- maybe just to give us a context on from what time you're expecting that currently versus what to you've been achieved in the year to date?

Well, so year-to-date, the average rate has been about 68 a bit, but we've seen the able to strengthen slightly. So we assume $0.70 for the whole of the second half.

Okay. That's perfect. And then just while we're on guidance. On the cost base, is it possible within this year's sort of OpEx guidance to look at what sort of component of that is related to Corus or non-propane products? And maybe just where on that question is can you give us a little bit of a feel for how we should be thinking about cost base into the 24s?

Yes. I mean the Corus, the big costs associated with Corus are on the R&D. And I think in R&D, we had about $13.5 million in the first half on R&D. Of that the exact figure, but I imagine close to 70% of us would have been associated with Corus. Now there's a lot of activities that are captured under R&D clinical parts of regulatory, parts of new product introduction in manufacturing, test systems, setups, et cetera. It's not just the scientific aspects of R&D. There's a lot captured in that. You will see R&D as a percentage of revenue has come down. I think last year, it might have been about 18.5%. This half it's currently running at about 16.5% or so. So our expectation is R&D as a percentage of revenue will start coming down, albeit would we will continue to invest in R&D, but it may be on different things. It may be on getting on to ultrasound, Fund 4, second generation sort of chorus, expanded indications, potentially other new innovations. But I think in general, the general thematic just moving forward is certainly with the underlying business on the trophon business, we're expecting to see operating leverage continue to improve. It has improved this half, and we're continuing to see it improve moving forward.

Perfect. And just final one, obviously, great to see a photo and a bit more context around the Corus. You mentioned that de novo is the hope for that to get it submitted in this half of the financial year? Or I'm not sure if you mentioned.

There's too many variables associated with that to give a definitive answer that will be held accountable for. So certainly this calendar year, whether it falls into this half or just a bit out at this half to be determined.

Okay. Great. Appreciate it.

I do want to be clear, this is a global product designed to be a global product. The U.S. will not be the first market we launch into. But obviously, it's a very important market, but it won't be the first market we launched into. The market introductions will be phased in according with the regulatory approvals. So the milestone of getting the FDA in is one, but then the time line associated with the de novo as well needs to go through. But I think we're certainly tracking the way we want to be tracking at the moment.

Did you -- sorry to sneak another one, but did you mention, Michael, on the call just around how you think about timing and say, potential global distributors or other partners that you may work with and when we hear a bit more power about that.

You'll hear about that when you hear about it. No, I haven't said anything more on the call.

Your next question comes from the line of Mathieu Chevrier from Citi.

My first question was on upgrades that you've been doing so far. What's been the average age of the devices that you've been upgrading? And how does that compare to your initial expectations around the life cycle of the device?

Yes. The -- I mean, the average age probably is around 8 years or so because there's a distribution of devices. If you take the devices are 7 years of age and beyond, there's a distribution by age. And we've got some devices out that are 10 years old, I guess, one sense that stands to the quality of the device. The -- but the average age is probably around 8 years, I would imagine. So it's sort of pretty much in line with what our expectations are.

Understood. And then in terms of the installed devices, have you seen instances where you haven't upgraded the device and the customers have decided to make do with another solution?

I can't point to any specific instances, but in markets where there is competition and if we don't get to those customers in time, I anticipate that we could lose some. But our expectation is that, by and large, the absolute majority, high majority of our current installed base will remain installed base for Nanosonics.

Yes. And then in case where that hasn't been the case. Is it just a function of functionality or pricing? Or is there anything you can point to specifically?

No. So to be honest, I'm not across any major details of where it's certainly not a common occurrence that's been brought to my attention. So I can't really proffer an opinion. I mean just as we may lose 1 or 2 in certain markets. I am aware where some of the competition had units installed or are using manual processes are switching over to Nanosonics as well. So by and large, I said this before on competition, I think competition is really important in this market. Why? Because there's a great opportunity for increased awareness and understanding by of the category. And our job then is to ensure that as the awareness increases, that Nanosonics continues to remain the dominant player, and that's exactly what we're working on.

Understood. And then just one on hospital budgets in the U.S., I mean, clearly, we've seen across different industries, job cuts, budget constraints. What have you been hearing from your teams on the ground so far this year?

Yes. We obviously read and hear all the commentary on hospital budgets and losses being experienced within hospitals and increased costs with agency resources that they have as they're losing full-time resources, et cetera. The -- I won't say we're immune to it, but the hospitals still have to comply with all the requirements for decontamination. And it's not that we're highly capital intensive from a budget perspective. So far, whilst we're aware of it and it may -- some of the budgeting may have delayed some of the timing, we've not experienced the impact of budgets to the degree that others may be experiencing at the moment. That's not to say that it's not coming. But so far, we're cognizant of it, managing it, some delays in uptake and not cancellations. We still have to go through the budgeting process. But so far, I think, especially what we saw between Q1 and Q2 and that sort of growth where it's not currently a major impediment to our growth.

Great. And just finally on -- I know you're not giving guidance for FY '24 today, but -- how should we think about operating costs given all the things that you're planning to do, hopefully, by the end of the calendar year and just thoughts on staffing levels going forward?

Yes. I mean in terms of the operating cost for this year, effectively, you should be thinking about this in the context of the guidance that has been provided. Moving forward, for the underlying trophon business, as I said earlier, we're expecting to see growth in operating leverage because the growth in revenue should certainly strip any growth in the investments that we need to make. Obviously, then we will be launching Corus and other things into the market, which will have come with a cost. And probably in the future, a greater might be useful that we just help the market understand between the differentials between the underlying business. So for example, in America, we have one slide in there, I think we showed it at the full year. If you just take the Americas and the operating margin over there is between 55% and 60%, and that's before we allocate any of our headquarter costs. So the trophon business is looking pretty solid. But then the -- any other costs that we'll be making will certainly be associated with things that we believe will drive long-term value. I think we've got time for one more question, and then we'll move on.

Your next question comes from the line of Elyse Shapiro from Canaccord.

Just on the gross margin improvements, what extent of those was driven by price rises and volume growth versus FX?

Probably similar sort of percentages of what we said, at least with the overall revenue. So about -- if you look at the overall revenue growth of 35%, we're saying about 7% of that was associated with FX. So pull that out. And then in terms of pricing and volume, it was almost equivalent. So that same sort of ratio flows down into the gross margin.

And then just quickly on the split between price rises and consumables, can you give a bit more color there? And then an understanding of customers' willingness to pay for them on a going-forward basis, especially on the consumables side?

So the -- as I said, the split between volume and pricing was almost similar. In terms of the pricing, there's 2 aspects to that pricing. One was the increase in price that we got were because of the switch from GE to us now selling direct to customers. So we're no longer doing a selling at a distributor price. We're just selling everything at the customer price. And then there was a small amount of price improvements associated with the negotiations we had with the customers in terms of setting up all those agreements. In terms of pricing moving forward, we think that the prices we've now been able to get through in the first half, we'd expect those to be quite similar in the second half. So not expecting further price increases because we've now effectively set price agreements in with all those customers. We've got enterprise agreements with -- that includes pricing with a lot of the IDNs, et cetera. So those prices are pretty much set in there. The only thing, Elyse, on pricing is, obviously, when you do both deals, somebody wants 50-ton upgrades, well, then they get discounts on those sort of things. But we are very happy to accommodate those sort of price reductions. Thanks very much, Elyse. Well, thank you all very much for attending this morning, and no doubt over the coming days, I may be speaking to many of you again. But again, we believe a very solid result for the first half, and we look forward to continuing to perform throughout the second half and beyond. So thanks, everybody.

Thank you.