Nanosonics Limited (OTCPK:NNCSF) Q4 2022 Earnings Conference Call August 22, 2022 9:00 PM ET
Company Participants
Michael Kavanagh – Managing Director and Chief Executive Officer
McGregor Grant – Chief Financial Officer
Conference Call Participants
Lyanne Harrison – Bank of America
Chris Cooper – Goldman Sachs
David Low – JPM
Josh Kannourakis – Barrenjoey
Martyn Jacobs – Canaccord Genuity
Raymond Jang – A Rich Life
Operator
Thank you for standing by and welcome to the Nanosonics Limited 2022 Full Year Results and Investor Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Michael Kavanagh, Managing Director and CEO. Please go ahead.
Michael Kavanagh
Thank you very much, Ashley and very good morning and thank you all for joining the call. I am joined here by McGregor Grant, our CFO here at our new corporate headquarters at Macquarie Park in Sydney.
Well, this morning, you will have seen the release of our FY ‘22 full year financial results and operational review, which outline a year of significant progress both financially and operationally as the business continues to invest in and execute on our growth agenda. There is a lot of information covered across all the materials released. So you have got the ASX release the Investor Presentation, the Annual Report and Sustainability Report. So, there is a lot of material to digest.
But if I was to summarize down into sort of three key messages or three key takeaways, they would be the first really is that importantly, our growth momentum has returned to pre-COVID levels, especially in the second half of the year and that bodes very well for our ongoing growth expectations. And this growth was across revenue, new installed base, upgrades and consumables.
The second key message or takeaway is that during the year and again, particularly in the second half, the company increased our capability and capacity to support ongoing growth through the successful change to a largely direct sales model in North America. We did continue to invest in our European and Asia-Pacific infrastructure as part of our geographical expansion plans and of course relocating to a new headquarters and manufacturing and R&D facility here in Macquarie Park, which gives us the capacity to develop, deliver and support a broader product portfolio that we are planning to release internationally.
And finally, the third takeaway centers around our R&D. So in addition to the ongoing establishment of trophon as standard of care, we certainly advanced our R&D program, in particular our new CORIS technology for endoscope reprocessing. And it was very pleasing to have the CORIS technology accepted by the FDA into their Safer Technologies Program or STeP program, which I believe is a recognition by the FDA. The CORIS technology could reasonably be expected to significantly improve the safety of patients over current available treatments, which is one of the criteria to qualify for this new program, but a bit more on that later.
So if I take each one of those top line messages and go into a little bit of detail first, across the growth momentum, from a total revenue perspective, revenue for the year was $120.3 million that was up 17% on FY ‘21. And while this result was previously announced in July, it can now be looked at in the context of gross margin and OpEx for the year, both of which also came in favorably. Gross margin for the year was 76.4% ahead of our February 2022 guidance. And this was mainly due to favorable pricing outcomes that we achieved in North America.
Operating expenses for the year were $90.5 million and these were below the anticipated $93 million discussed in February. And some of that savings was associated with management of our operating expenses, but timing related to hiring of a number of headcount. So, overall, a good result, especially taking into consideration the foreshadowed one-off revenue impact in the second half, that was associated with the transition to a largely direct sales model in North America. That back in February, as you will remember, we estimated to be somewhere in the range of $13 million to $16 million. So, in that context, an excellent result.
And just as a reminder that $13 million to $16 million, that impact – that was primarily associated with the fact that GE Healthcare in North America would rundown their capital and consumable inventory as they transitioned to a non-stocking capital reseller as they transferred all their existing trophon customers to Nanosonics for ongoing provision of consumables which they have now.
So breaking that revenue down as we do traditionally into capital and consumables, total capital revenue for the year was $37.7 million that was up 41% on prior corresponding period. And this increase over PCP really reflects the growth in installed base as well as upgrades, but also the recovery from what was a significant reduction in capital sales to GE in the first half of FY ‘21. And of course, that was related to the negative impacts of COVID-19 on new installed base growth at that point in time. So overall for capital revenue, a good result. From consumables and services revenue, that was $82.6 million for the year that was up 8% on prior corresponding period. And the consumables and service revenue now represents approximately 70% of total revenue for the year. And of course, the attractive that’s really highlights the attractive annuity revenue nature of the business. And what we did see on the consumables side is that as the COVID-19 restrictions ease during the year, again, especially in the second half where hospital conditions improved, we did see ultrasound procedure volumes returning to near pre-COVID levels.
If I break the revenue results down by region briefly, well in North America, the total revenue for the year was $106.9 million. So that was up 20% on prior corresponding period. Capital revenue in North America was $33.6 million. So, that was up 58% on the prior corresponding period. And that was again associated with growth in IB upgrades, but also reflects what I just mentioned earlier, with respect to the impact that COVID had on sales to GE Capital in the first half of FY ‘21. So – but overall a good result for Capital in North America.
It is worth noting as we are going through the results and there is a lot of detail for everybody in the investor presentation that while the installed base and upgrades units sold in the second half of the year increased, indeed, the strongest half we have had in over six halves, capital revenue in the second half of $16.3 million was down 6% compared with the first half. That is primarily due to the transition to the revised North American sales model and GE Healthcare destocking and becoming a non-stocking capital reseller. So, it’s primarily associated with that. But very importantly, the installed base and upgrades did continue to grow very strongly in that second half.
The consumables and service revenue in North America was $73.3 million, again, up 8% on prior corresponding period. In the second half, the consumables and service revenue was $36.3 million, so again, down 2% compared with the first half, but again, purely a reflection of the impact of GE Healthcare destocking as opposed to anything else out in the market.
Moving across the pond in the Europe and Middle East region, total revenue for the year was $7.5 million. So that was up 4% on the last year, with improvements in the second half compared to the first half, where revenue in the second half was $4.1 million that was up 21% compared with the first half. For capital revenue, again, when assessing capital revenue in EMEA, it’s important to take into consideration that the majority of units that we place in the UK, which is our largest market in the region, they are under the managed equipment service model, where no capital revenue is recognized. So overall for the region, capital revenue taking those into considerations was $2.1 million, which was down on the prior corresponding period. But again, a lot of that due to the sales mix with the UK.
But there are other elements of course, in the European region that has to be taken into consideration. The war delayed easing of COVID-19 related market restrictions compared to what we saw in North America, coupled with other factors, including the impact of sanctions on Russia, where we had been actively selling through distribution in Russia for a number of years. So, a number of the sales that we had forecasted, especially in the second half of the year in Russia, did not go ahead. Consumables and service revenue in EMEA however, it was $5.4 million, so that was up 20% compared with the last year and that reflects the ongoing growth in installed base as well as the ultrasound procedures volumes returning to near pre-COVID levels, again, with the second half stronger than the first half.
In Asia-Pacific, you remember that in the second half of FY ‘21, we had a large upgrade order of 200 units with I-MED Radiology, which is the largest customer here in Australia. Now, such an order was not replicated and in FY ‘22. And as a result of this, despite ongoing growth in new installed base, total revenue for the year of $5.9 million, just under $6 million was down approximately 10%, 12% compared with the prior corresponding period. We did see the second half stronger than the first, because as we all know here in Australia, in certain states in Australia, there were restrictions throughout the year, but the second half was stronger with the overall revenue up 3% versus the first half at $3 million. Our consumables and service revenue of $4 million, it was actually the same as the prior year, but most of that actually relates to timing of shipments to distributors, actual sales of consumables to end customers actually did increase in FY ‘22 compared with FY ‘21.
Moving on to the installed base, the global installed base increased 12% to 29,850 units at the end of June, that’s an increase of 3,100 units for the year. And as of today, the installed base is now over 30,000 units, which is a great milestone. Importantly, the install base increased just under 1,700 units in the second half, so that was up 20% with the first half. And that second half installed base growth was the highest in over 6 halves, because of the impacts of COVID. And but again, giving very positive indications we are back to pre-COVID growth momentum levels.
Regionally in North America, during the year, we reached a milestone of 25,000 units installed across over 5,000 institutions, really consolidating trophon’s position at standard of care. And by the end of the financial year, there were 26,130 units installed in North America. So that’s an increase of 11% or 2,650 new units installed for the year in North America. We did see hospital access continue to improve throughout the year and the installed base increased by just under 1,500 units. So 1,450 units in the second half and that was up 21% compared with H1, again giving confidence of getting back to the run-rates that we were getting in North America pre-COVID and we anticipate for the coming year.
The North American installed base now represents approximately 45% of the estimated total addressable market of 60,000 units. But of course, the overall ultrasound market itself continues to grow with new ultrasound innovations coming into the market such as wireless handheld probes being released, and our R&D team have developed an accessory to enable wireless probes to be decontaminated in trophon with the first of such accessories due to launch sometime in the second quarter of this year. So, plenty of opportunity for ongoing growth, certainly in North America.
In the Europe and Middle East region, the total installed base increased by 21% to 1,820 units, so that was up 310 units for the year. And as already mentioned, delays were experienced in the easing of COVID-19 related market restrictions over there as well as the impact of staff shortages when the Omicron versions case of COVID in particular in the first half. In the second half, market conditions did improve and new installed base across that region of 170 units was up over 20% over the first half.
During the year, we did continue our investment in the EMEA region, and in particular, our direct markets in the UK and Germany. And now with market restrictions and hospital access markedly improved, our expectations are that in FY ‘23 we will see the first full year since 2020, where the investments in this region can now be fully leveraged. In Asia-Pacific, the installed base increased 140 units for the year with the total installed base increasing 8% to 1,900 units.
In Japan, we expanded our local team and medical affairs activities as we continue to work with local authorities on establishment of local guidelines. Progress has been made in this area. And it was pleasing to see that the JSUM or the Japanese Society for Ultrasound and Medicine, publishing on their site, a Japanese translation of the World Federation guidelines, which support high level disinfection. If this is not an official guideline of JSUM, but a good indication they are going in the right direction.
Our other geographical expansion activities for Asia-Pacific did also progress where in China, the registration of our wholly owned foreign enterprise or WOFE that was completed. And after significant delays as everybody knows in Shanghai, there were lockdowns due to COVID 19, the required local testing of the trophon device and consumables by the relevant state authorities that has now commenced as part of our product registration plans.
Moving over to upgrades briefly. As you know, upgrades represent a significant opportunity. And there are currently approximately 9000 EPR, the original trophon EPR devices that are 7 years old or older. And FY ‘22 has really been the first year we have put a focus on upgrades considering the impacts of COVID over the last 2 years, where we focus our efforts on new installed base with the limited hospital access in those periods. And pleasingly, there were 1,000 upgrades units were sold in the year, that’s up 135% compared with FY ‘21. And again, we saw good growth momentum in the second half with upgrade unit sales, up 50% over the first half. And this growth in the second half was not really anticipated as we were going through the GE transition in H2 and the majority of the upgrade opportunity in North America is which he of course – or I should say GE customers.
But what was very pleasing, however, was the upgrade sales in the fourth quarter of the year, which represented nearly 65% of the total upgrade sales in the second half. Of those sales, the Nanosonics direct team, were responsible for nearly 90% of those sales. And this result really demonstrates the opportunity for Nanosonics to further drive the upgrade strategy now that we have direct access to all trophon customers. So, really it’s quite a pleasing result on upgrades.
The second message I mentioned was related to our ongoing investments and our expanded capability and capacity that we have developed over the year and there still remains very significant opportunities for growth in what is a multibillion dollar global infection prevention market. And we do have a very purposeful strategy to continue to invest for growth. And aligned with it, operating expenses for the year were $90.5 million so that is up 28% on last year, but below the anticipated $93 million that was anticipated when we discussed it in February. When thinking of the investment, I think it’s important to appreciate that very attractive return from these investments are expected over time, especially with annuity consumable business models, which of course trophon is as you know and CORIS is intended to be.
And if you look at our North American business, it’s – gives a very good indication being an established more mature market for us. And in that market, we are achieving operating margins have been in the range of 55% to 60%. So very attractive returns can be achieved. We are very confident in the directions that we are taking from an investment perspective. To give you a bit of a flavor of our OpEx breakdown and you will find some details of this in the investor presentation. But importantly, the majority of our OpEx is focused on future growth activities.
During FY ‘22, 43% of the OpEx was actually associated with market development activities across the regions. And the increase in these costs also included the additional investments we made in the second half really in Q4 of approximately just under $1.8 million to expand the company’s North American operations. 25% of the total operating expenses were associated with the company’s innovation program across the new Nanosonics CORIS technology as well as ongoing programs across our other platforms in ultrasound reprocessing and cloud solutions and then 32% of our total operating expenses relate to the company’s infrastructure, including manufacturing and other headquarter support costs. And as you know, the company did we – we did move to new corporate headquarters manufacturing and R&D facilities to support the ongoing growth and we did incur additional costs of approximately $1.5 million as a result of this relocation.
Then another significant element of our capability advances was the successful transition to a largely direct model in North America. And the transition to this new model has now been successfully implemented. The expanded North American teams in place, including the hiring of a number of members of the former GE high level disinfection team, shipping volumes through the Nanosonics logistics facility in Indianapolis are up well over 100% in the last 3 months with no disruption in supply to customers and sufficient capacity in place to support expected future growth. The team has also executed numerous new enterprise agreements with strategic accounts, integrated delivery networks, with many more due to be completed in the coming months. We have also established the necessary partnerships to enable selling to U.S. federal government accounts, where GE previously represented 80% of those sales to those accounts.
So really, our North American direct team is now well positioned to manage the overall growth strategy associated with new installed base upgrade adoption and consumables usage. And the business performance in Q4 in particular saw many of these benefits start to come to fruition. In that quarter alone, the Nanosonics direct team, were responsible for 91% of the new installed base, together with just under 90% of upgrade sales. We are doing a great job. And of course, the resulting deeper customer relationships now that we will have with the majority of North American hospitals and corresponding infrastructure expansion that we have put into North America also supports our planned product expansion beyond trophon.
And finally, the third message related to our R&D program and advances in the CORIS development. In the last year, we invested $22.3 million in R&D, which is up 30% compared with FY ‘21. And many of you will understand that this is still a relatively small amount in the context of medical device developments, especially when you are looking at capital equipment coupled with chemistry in software developments all combined. But through the investments the company made this year, which are all expensed, the company we have expanded our capacity and capability with programs across our various platform groups being the ultrasound reprocessing, endoscope reprocessing and data through cloud solutions as well as chemistry and our bioscience activities.
And while there are number of R&D programs underway, the central near-term program is associated with our new CORIS platform, which is previously discussed aims to deliver a solution to one of the biggest unmet needs in instrument reprocessing and that is reprocessing failures of flexible endoscopes due to current limitations of manual cleaning, which ultimately then results in an increased risk of cross contamination.
Now, in the Investor Presentation, there are quite a few details about CORIS. But I will highlight just a few here this morning. First of all, the CORIS technology recently was accepted into the FDA Safer Technologies Program or STeP program. This is a relatively new program introduced by the FDA. And products are only accepted into this program if they are reasonably expected to significantly improve the safety for patients over currently available treatments. And based on the data that we provided and information we provided to the FDA all about CORIS, well then we were very pleased that it was accepted into the STeP program. And the ultimate goal of STeP is to provide patients and healthcare providers with timely access to these medical devices by expediting their development assessment and review, whilst of course preserving the statutory standards for approval.
We see this as a great acknowledgement that the CORIS technology could indeed be transformational. And whilst the regulatory approval process with the FDA will be a de novo approval as expected, because there is no predicate for this new technology having been accepted into the STeP program should help facilitate a much smoother approval process through that de novo process.
The investor presentation also gives some indication as to the types of results, the CORIS technology is designed to deliver. In particular, bio-film removal from small channels in endoscopes, which is a significant hurdle today. Essentially, current manual cleaning is totally ineffective in bio-film removal, whereas CORIS is highly effective and you will see some slides in there demonstrating that in the investor presentation. But we also show that the CORIS technology can far surpass the current cleaning benchmarks recognized bio-regulators, where it removes difficult soils to an order of magnitude better than industry recognized cleaning benchmarks, including new alert levels that are defined by ISO standards. So, it really does deliver significant improvements over what is achievable today.
And finally, the potential market opportunity for CORIS is significant. Strong fundamentals and standards already exist around the world for endoscope reprocessing. There are over 16 million procedures conducted annually and that’s growing at about 6% per annum. And that’s across the U.S., the main European markets and Australia, so not including China, Japan, etcetera. And there are studies that have been published that demonstrate that the current cost associated with the cleaning step alone of a flexible endoscope can be anywhere between $11 and $37 and CORIS aims to automate a significant proportion of that current manual cleaning. So, the opportunity is large. And as previously communicated the company we continue to target progressive market introductions aligned with regulatory approvals with the first introduction targeted for calendar 2023. And first release is likely to be in Australia and/or Europe considering the de novo application process, but it is great we have got the STeP program acceptance, which should help facilitate through the de novo approval process with the FDA as well.
So a few final comments, then I will hand over for questions. Briefly, it’s worth noting on working capital that during the year the company increased its inventory holding to $22.6 million. And this increase was driven by the need to carry more safety stock in response to increased supply chain risks caused by the COVID-19 pandemic and of course, the company’s transition to a largely direct sales model in North America as well. And importantly, however, as a result of our current pandemic inventory policy holding policy, there were no supply disruptions to customers. We expect to maintain inventory at a similar level throughout FY ‘23. And that really reflects the ongoing complexities with the global supply chain and the move to the direct model in North America. But once the supply chain risks reduce however then we can reassess our holding requirements which can likely be reduced. From a profit perspective, profit before tax for the year was $1.6 million. And that reflects the increased investments that people were aware we were making in our growth agenda as well as of course the foreshadowed impact in H2 on revenue in North America associated with the move to a largely direct sales model.
So finally, from a business outlook perspective, you will see we are targeting good ongoing gross revenue in FY ‘23, with expectations of growth between 20% and 25%. Our gross margin expectations are between 75%, 76%, but the ultimate gross margin will reflect one, an increase in the proportion of capital revenue that we expect, resulting from growth in sales across new installed base around the world, but also now upgrade units. The other impact is freight costs which currently remain high. But if they improve, then of course, our gross margin will benefit. And of course, we do have to take into consideration the potential impact of inflation and supply constraints, in general on component costs.
We do plan to continue our investments for growth. However, our operating expenses will grow less than the revenue growth, with operating expenses expected to grow approximately between 15% and 18%. And again, the majority of that increase is expected to be weighted towards our ongoing market development as well as ongoing product innovation. It is important I guess to state that whilst we have entered FY ‘23 quite optimistic, naturally all this guidance is subject to ongoing uncertainty in relation to variability in market access conditions should COVID-19 related measures change in relevant markets and of course, the broader economic and geopolitical uncertainties that’s out there at the moment.
So with that, I will now pause and hand over for any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America. Please go ahead.
Lyanne Harrison
Hello, Michael and McGregor. Thank you for taking my questions. If I could start with the GE Healthcare arrangement, I think it’s great that the Nano team sold 91% of new units in the most recent quarter. But I was under the impression from earlier announcements made around February at the time the buy seller arrangement was announced that GE would still play a more active role in selling the trophon can you talk to that a little bit in terms of what might have changed? Obviously, we understand that arrangements extended to financial year or to June 23 and what happens after that?
McGregor Grant
Thanks for the question. GE have extended the contracts with Nanosonics now as a capital reseller and for further 12 months and have ongoing access to the capital equipment. Even prior to this change to the largely direct model, I think I have spoken in the past that our direct team were already generating probably upwards of 70% of the GE demand for installed base anyway, because we were much larger group out there, but the actual sales ended up being transacted through GE. Moving forward what our expectations are and quite frankly, our desire is that we continue to partner with GE Healthcare, where our expanded team now will provide support where necessary to their ultrasound sales team. So if their ultrasound sales team need access to trophon to bundle with a sale of one of their ultrasounds or indeed if they are in just talking with their existing ultrasound installed base and they require an infection prevention solution. Well, then they will call in our team to provide the support that they used to get from the HLD team with GE. And when we go in and do that support, what we expect is that the transaction will even though it may have been generated by GE, the transaction will very likely still go through Nanosonics and the reason for that is that a) Nanosonics will be responsible for the shipping of the device to the customer, the installation of the device to the customer and the ongoing sales of consumables to the customer. So, it’s very likely that the transaction will go through GE, but GE still have the option to go through Nanosonics I should say, but GE still very much have the option to have access to the capital and to be able to do the transaction directly.
Lyanne Harrison
Can I just follow-up on that? So if the transaction goes through Nanosonics, what incentive then is there for GE to support the sales of a trophon when they are making that ultrasound sale?
McGregor Grant
It all comes down to what their customer requirements are. There is no financial – real financial incentive unless they transact themselves and we will sell to GE as a price where they could make a margin. But even though we will be shipping it, etcetera – but the ultimate driver will be their customer requirements. If the customer requires an infection prevention solution, then we will be the company for them to call them.
Lyanne Harrison
Okay, thank you. And if I could move then on to consumables, so I am trying to estimate what the consumables revenue exit growth rate was toward the end of financial year ‘22. And so understand that it was lower because of GE running down the inventory. But can you give us a sense of what that might have been without that, I guess that GE blip?
McGregor Grant
It’s hard. I mean, year-on-year does growth obviously the revenue that we get was impacted because of the transition as you rightly point out as where they didn’t do any restocking. But in terms of units going to market, I think to end users, there was definitely growth year-on-year and even in the second half. I think moving forward, what you will see now in consumables revenue, in particular in North America will be a much – will be much more tightly correlated with the actual market demand. So you won’t have those complications associated with inventory that you have been trying to navigate over the last number of years, but definitely I don’t have the exact growth figure at the top of my head, but it’s certainly probably in the order of 7% to 10%.
Lyanne Harrison
Thank you very much.
Operator
Your next question comes from Chris Cooper with Goldman Sachs. Please go ahead.
Chris Cooper
Yes, good morning. Thanks very much. Just on the gross margin, Michael, if you don’t mind. So when you announced a new arrangement, you obviously indicated the gross margins are expected to go up from the end of fiscal ‘22. You did also say you achieved better pricing outcomes this year than you expected. But you are now guiding to a further contraction in gross margin in ‘23. Can I just understand that the moving parts there and whether the expectation is that you get back to that sort of 77%, 78%, 79% level that you had been foreshadowing earlier in the year?
Michael Kavanagh
I don’t think it was ever foreshadowing us getting up to 79% early in the year, but the ultimate goal over time, Chris is that we will get back to gross margins like that. The big driver is will be on capital mix. And as we’re going to be selling more upgrades, and because the margin on the capital equipment is lower than the consumables as well as selling more installed base, well, then that will have some impact on the mix. The other big impact, though, is still freight. And I think, like all companies were still being impacted on freight costs. So that’s why we were sort of guiding to the between 75%, 76%. But once if freight can be normalized I think we will – we certainly would benefit from that.
Chris Cooper
Okay, on CORIS, first of all, can you just confirm the product design stage has finished here? The wording I found was a little unclear on the materials in the deck. But also just on your expectations for U.S. approval. I guess it sounds like this could be some way out now that de novo has been confirmed. How are you thinking about the design of that trial? It sounds like you have been in discussions with the FDA. You provided them with some data. What endpoints do you think is going to be needed and what is your best guess for U.S. launch at this point?
Michael Kavanagh
Yes. Look, I am not going to try and put a specific date on the U.S. launch. It certainly will be de novo. We would like to think by virtue of the fact that we have been accepted into the STeP program. STeP, it’s almost like a concierge program where in normally with de novos you got stops and starts as they are asking questions. Whereas with this STeP – being part of the STeP program that can help to facilitate a much smoother process through the de novo. In terms of clinical trials, we have not done the external clinical trials yet that are going to be required for de novo, but they are in plan for the calendar year. And the – so but our expectations are because of this de novo can take a little bit longer than a 510(k). And remember, the de novo cluster is no predicate. And being no predicate means in one sense, that it’s a totally new technology, where we will now set the benchmark. So, it likely will be in Australia and/or Europe that may be first and then, but we wait and see, based on the timings of the submission to the FDA with the de novo and how smooth that process goes.
Chris Cooper
Okay. So, to just clarify that, so the product has been finished, it’s no longer in design phase and the clinical trials, you said, are in plan for the calendar year that’s 2022 or 2023…?
Michael Kavanagh
I mean you would understand in finishing a product to have it ready to go to market, there are many dimensions to it. So, there is still some optimization that we are doing in parts of the design to make sure from a manufacturability and serviceability perspective. There is elements associated with the manufacturing setup. There is all the test systems that have to be designed and implemented in for manufacturing. There is the procurement and supply chain, which is all remember, this is not true funding. These are all new components. So, there are still dimensions that have to be still completed. That’s why, we are still saying calendar ‘23, there is still work to be done. But in terms of the product that we are comfortable, delivers the outcomes that it’s designed to deliver. Yes, we have that. And I look forward to spending a bit of time with you, bringing you through some of the data that’s in the investor presentation, which is quite impressive.
Chris Cooper
Got it. And so those optimization procedures will be completed, and you will be moving into clinical trials you said in calendar year 2022.
Michael Kavanagh
In the calendar year, between ‘22 and ‘23, I am not going to go into absolute details on the specifics. I think that the best thing to do is just to as we have said in the past, we are still targeting calendar year ‘23. That’s still the goal.
Chris Cooper
Okay. Thanks. Just very final question, you had guided to sort of $13 million to $16 million revenue hit in the second half of ‘22? Can I just confirm it’s not a perfect science, but is that broadly where you think it came in? And by extension, do you think that GE still has any inventory left as of first of July?
Michael Kavanagh
Yes. No. GE don’t have any inventory left. And probably on the $13 million to $16 million, probably on the lower end of that. So, would be favorable.
Chris Cooper
Got it. Thank you for the help.
Michael Kavanagh
Thanks Chris.
Operator
Your next question comes from David Low with JPM. Please go ahead.
David Low
Thanks. Maybe if I could just to stay on that topic. I mean, admittedly, I have used a bigger destocking impact. But I mean when I ran the calculations, if we stripped that destocking effect out of FY ‘22, the revenue guidance for FY ‘23 looks relatively light on particularly given the momentum that we see in the install base. And frankly the opportunity in upgrade sales, just sort of wondering whether there is anything else that I am not thinking about there.
Michael Kavanagh
Now, I think 20% to 25% growth is a pretty stellar. I mean we are looking at remember, what we are trying to do is to get back in North America to the 2,800 to 3,000, new IB per annum over there. And based on the second half, where we should be back to the run rate. Based on the upgrades we should obviously have growth in upgrades again, in the United States and obviously, we are anticipating good growth in Europe as well. As long as the markets remain, the market conditions remain favorable. So, I think if you look at 20% to 25%, it’s not insignificant. Remember a lot of the consumables makeup also 70% of the growth. So, a lot of the consumables revenue that will come through from that will come through over the period, the full period of the 12 months. You won’t get the 12 months effect of that growth in the install base from day one. So, all up, when we did all our modelling, we thought somewhere between 20%, 25% growth is a decent growth rate.
David Low
No, I don’t disagree 20%, 25% is a good growth rate, maybe my logic is flawed. But what I did is I said is a starting point, there is $30 million of destocking revenue in FY ‘21, sorry ‘22. So, if we add that back, it implies only a 10% ish growth rate. Maybe I am not thinking through it logically.
Michael Kavanagh
When we catch up, we all move on, David, when we catch up. Yes.
David Low
Yes. Perfect. Just one other question, then on the CORIS device, I mean you have talked about the cost of cleaning today at $11 to $37. I am sure you are not going to want to give us full detail. But am I right in assuming that the cost with the CORIS device are going into plan would be comfortably below that level or below the low end of that range?
Michael Kavanagh
I think the message to take away from that $11 to $37, along with 60 million procedures is that the market opportunity is significant. And bringing transformational automate has technology to market where the fundamentals of those markets are quite different to what they are in trophon in every major market around the world. You have got standards and requirements, people are already – we are going to have to reprocess and clean and decontaminate endoscope. So, it’s really that was to give an indication that the market is a significant market. Today, we are not necessarily divulging what the cost per cycle is, where CORIS is going to be. But it will be beneficial for our customers.
David Low
Okay. Thank you. Look, my only other point of question, just perhaps for McGregor, OpEx came in a little short, I heard the commentary about something to do with – some degree to do with timing of bringing in new staff. Should we assume that the OpEx guidance for this year is a bit front-end weighted as the staff come on, or is it more likely to be sort of equal through the periods?
McGregor Grant
It’s going to be fairly even throughout the year. We do not – we are not adding significant headcount throughout FY ‘23, so we expect that to be fairly evenly weighted throughout the year.
David Low
Okay. Great. Thank you very much.
Operator
Your next question comes from Josh Kannourakis with Barrenjoey. Please go ahead.
Josh Kannourakis
Good morning, Michael and McGregor. Can you hear me, okay?
Michael Kavanagh
Hi Josh.
Josh Kannourakis
Yes. Good. Thanks very much for taking my question. Firstly, just on the CORIS, in terms of the go-to-market, and I know that you can’t say too much. And thanks for that extra detail that you have provided. Have you been in consultation with some of the OEMs in the market in terms of the endoscope players? And I am just interested in how you sort of see us thinking about maybe distribution for that product?
Michael Kavanagh
A good question and your first statement was really – was correct. We are not really going to go into the details around the commercialization strategy. But as you can imagine, we anticipate that the channel strategy for CORIS, just like trophon will be a mix of direct partnerships, whether that’s with OEMs or other relevant distributors, etcetera, will be determined. So, there will be a mix of models as we go around the world.
Josh Kannourakis
Okay. Understand. And just with regards to the, in terms of pricing across consumables, and the capital sales, could you give us a little bit more context just around what we saw across the different regions in period, and how we should be thinking about that on a go-forward basis in terms of any other further annualization benefit or cost recoverability of inflation impact?
Michael Kavanagh
Obviously, now that we are more direct in our largely direct in North America. We have got favorable pricing moving forward and that’s part of the 20% to 25% growth projections that we have put out. There has been some price increases, but not wholesale price increases to offset all inflationary measures at this stage, and freight costs, etcetera. But there will be some favorability and pricing which is all built into that 20% to 25%.
Josh Kannourakis
Got it. And final one for me just around North America, thanks for noting the profitability there. I think you mentioned this sort of 55% operating margin. How should we be thinking about, I guess some of the other regions at maturity, and should we be using that as an example?
Michael Kavanagh
Well, I guess that’s the intent, why we put that in there is when you have got markets, especially in direct markets, where the fundamentals are strong, and we are working towards all of that in all of the major markets we are going into now. And you have got sort of growth rates that we have seen in North America, well, then our expectations is that we can generate similar sort of operating margins. So, it’s – that’s why those investments that we are making are really important because with is a consumables business and the new history in revenue business that we have, the operating margins can be quite significant.
Josh Kannourakis
Great. Thanks very much, guys. Appreciate it.
Operator
Your next question comes from Martyn Jacobs with Canaccord Genuity. Please go ahead.
Martyn Jacobs
Good morning, guys. Congratulations on a pretty good result in tough circumstances. So, I will just start off with the new sales model, you are now at about 44% penetration in North America. How much scope do you think there is for optimization within existing customers? Does the upgrade cycle play much into that?
Michael Kavanagh
I think certainly those upgrades play into it, a lot the install base, I mean it’s over 9,000 units now that are over 7 years or older out there, and we will now be able to have a focus on upgrades that we have. All customers are now in Nanosonics customers. The other part I think over time is the education continues to be a cornerstone of our marketing efforts. And when you will look at the – all the different types of ultrasound procedures that confer semi-critical status on the probe and therefore require high level disinfection, there is still a lot of education to do there, which could ultimately result in an increase in consumables usage. So, there definitely is an opportunity to optimize usage, but optimize adoption of trophon, because when GE were selling into certain accounts, they may have just sold one or two units into a particular department associated with the sale of an ultrasound. Whereas when we go into an account, we are agnostic of that ultrasound type, but also we will optimize based on reviewing that whole department, as opposed with respect to their trophon needs. So, if they originally had two, they probably needed seven or eight. So, there is an opportunity to grow install base through the existing install base as well. So, there is certainly the benefits of going direct. I think we will start to see coming through even more in FY ‘23, just like we saw that started to come through in the fourth quarter.
Martyn Jacobs
Would you expect accelerated growth in upgrade units in ‘23?
Michael Kavanagh
It’s off a low base, if you are looking at it on a relative, I mean we certainly expect more than 1,000 units going out in North America next year.
Martyn Jacobs
Right. And so what hurdles do – in regard to Europe, what hurdles do you think are left to overcome to generate sort of material uplift?
Michael Kavanagh
I mean it’s a great – I mean the good thing about North America is it’s a large homogeneous market, whereas in Europe, we are dealing with lots of individual markets that are at different stages. So, some are doing well, UK and Germany coming online, and others have more developments to do in terms of education. So, it’s – to us, it’s just a matter of time. I mean a lot of the guidelines are in place there. Automation is certainly favored. Wipes are certainly being discounted now in a number of markets where they are not being accepted as appropriate for high-level disinfection. So, the fundamentals are certainly improving. And as I have said, the last 2 years, we have been significantly impeded in market access to strengthen those, whereas this year assuming that the market conditions – positive market conditions continue, and with the caveat that they still got to come into the Northern hemisphere winter, who knows what’s going to happen. But assuming that they continue, this will be the first year that we will be able to have the first full year of the field force out in the field, highly active engaged on front of customers. So, we would like to think that we will get a good return this year on that.
Martyn Jacobs
Just a couple more for me. So, you provided some detail on feedback regarding AuditPro and ISO accreditation coming. Can you see evidence that AuditPro is actually helping you sell trophon and into the broader ultrasound market can see that evidence yet?
Michael Kavanagh
Not yet, a bit too early. And no, certainly in the – for AuditPro this year, we focused on a lot of initial accounts and some of those quite important luminary accounts. I would say that transition, where GE did impact a little bit on what we were doing with AuditPro, but also the ISO27001 accreditation is going to help a lot in terms of answering all the necessary questions hospital needs, before they implement new IT solutions or IT-based solutions into their network. So, at this stage, early days, not seeing the impact on trophon just yet, but we certainly believe moving forward that says, it will and not only will, but could help on the consumables side as well.
Martyn Jacobs
Right. And last one, with regards the new facility which you have just moved into, what’s your starting spare capacity with that, because you have all movements around size impact or the size increase?
Michael Kavanagh
We see that this facility will see us through for at least 5 years. From a manufacturing capacity, plenty of capacity in manufacturing to support ongoing growth of trophon, capacity for CORIS and potentially other things as well. And from a headquarters – head office perspective, there is certainly capacity for ongoing growth in staff. Now, we are not anticipating large growth in staff locally here in Australia headquarters. Most of the headcount growth for FY ‘23 will be out in the regions.
Martyn Jacobs
Great. Thanks very much.
Michael Kavanagh
Okay. I have got time for one more question.
Operator
Thank you. Your last question comes from Raymond Jang with A Rich Life. Please go ahead.
Raymond Jang
Thank you. In terms of disruption risks, what do you see as the biggest threat to trophon and traditional chemical based high-level disinfection methods?
Michael Kavanagh
Well, I think what trophon has done from a chemical base is it moves the industry away from some of the toxic aldehyde chemistries to our hydrogen peroxide based chemistry. But importantly, their mechanism of action being and how the technology works, being very environmentally friendly. I think there is a hydrogen peroxide being broken down to oxygen and water in a cycle. And it’s only a very small amount that’s used per cycle. We don’t see a major disruption to chemistry based as opposed to more – a move towards more environmentally friendly chemistry base, because chemistry has certainly numerous benefits over alternative mechanisms meaning you can’t – for example, you can’t have heat based with sterilization, because a lot of these medical devices just would not survive the high temperatures and high pressure required, like in all the class etcetera. So, we are not seeing – we are certainly not seeing any major disruptions associated with moves away from chemistry, as long as that chemistry that’s provided is environmentally sustainable.
Raymond Jang
Thanks for that. Appreciate that answer.
Michael Kavanagh
Okay. Well, thank you all very much for again attending this morning. As I say there is a lot of information that has been posted and I am sure particularly in the investor presentation, that maybe many of the questions just a lot of more questions may be answered by going through that. But I look forward to catching up with a number of you as the week progresses. Thanks very much.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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