NAN 2.98% $5.53 nanosonics limited

Notes from AGM

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    I have been a shareholder for 3 years now and Nanosonics is my one of my largest holdings. Here are my general notes and random snippets from the NAN AGM.

    Firstly, I must say that I think NAN is one of the best emerging growth stories on the ASX.

    Random notes in no particular order:

    We have laid a solid foundation for fantastic growth. We have increased our R&D spending by 50% (currently 17% of sales) and are working on a suite of products. Steven Farrugia (co founder of some of ResMeds early patents) has already made a big impact on the company. There was a hint today that the new products will also have a consumable element building another layer of recurring revenue into the future.

    The major manufacturers are coming to us and telling us what is next in their pipeline so we can build associated products to go with them (confirmed that this is other than just probes!) This is potentially huge. These new products have been requested by our customers at the point of care, address currently unmet needs and address significant markets.

    We are working hard on the Japanese market which is considered the second largest market in the world for our products. First revenues from Japan expected in FY 18. We are doing research on the Chinese market with a view to seek approval in due time. We have had strong distributor demand and interest from China but we must go slow and carefully into that market. We have India on the radar but one thing at a time.

    We have significantly improved our board and management with the inclusion of Steven Farrugia (Ex ResMed original), Steven Sargent (20 years with GE and involved when GE did a deal with NAN and took a stake in the company) and Marrie McDonald (CSL board and ex member of Australia's take over panel and and a lawyer specialising in mergers and acquisitions.) We have made significant improvements in our manufacturing with Gerard Putt (ex ResMed) finding ways to make it a leaner operation.

    The company is working hard to educate existing clients (this is a long term process) on the benefits of sterilising all probes not just ones used for invasive procedures. One installed trophon on average generates around $3000 a year in consumable revenue. The exact amount NAN gets directly depends on who sold the unit etc. However, if we can get our customers to just do "one" clean at the end of each day for non invasive probes this would increase consumable revenues by 30%. Think of the snowball effect here with 1000 units being installed a month and only 25% of US market currently penetrated and ROW to come. UK next major market.

    Europe is picking up. Germany, France and Middle East starting to show more movement. Get this - no current guidelines in France and sometimes they don't even clean the probes at all! We have met with the Minister of Health in France and they are starting to review this.

    We have approval for Mexico and are working on that country for next year. We are working on Brazil but looks like a 4 year approval process. Working with authorities to expedite this. Our aim is to be completely global and the standard of care. There is no completion is sight. Our biggest competition is lack of awareness and education which we are working on. Being the only automated way to kill HPV virus is attracting a lot of attention.

    UK guidelines due any day (hopefully latest by end of year) and will significantly increase orders as their guidelines will say they have to go to high level disinfection that only NAN provides. Hospitals waiting for this before ordering. Interesting to note that due to the British economy we have cleverly introduced a new business model called the "Managed Equipment Service" model. This allows us to place Trophons in at no cost but include the cost of the unit into increased consumables. The pay back on the unit is about 3 years with blue sky on higher consumable sales from there.

    Units have a 5 to 7 year life cycle and this helps is time our generation 2 trophon. Major services are required at 5000 cycles or run throughs. So as the installed base grows replacement of old units and servicing of existing units will contribute nicely to revenue.

    Our main patents are protected out to 2026 and we continue to add new IP to strengthen this. In relation to protection on consumables - we are protected in three ways - (1) Regulatory approvals - it is the system that is approved and if anyone wanted to use a generic consumable it would have to be approved by the FDA and equivalents around the world. (2) Significant IP protection giving us legal protection (3) Validated with over 1100 probes. Manufactures will not allow any generic consumables with their probes and this took years for NAN to achieve. This is a real barrier to misuse of consumables and a nice moat.

    Agreements now signed with all major OEM's of the probes in the US so they can also sell Trophon to their customers direct. This is big. We still retain the customer afterwards for installation, consumables and service agreements.

    Some good quotes from the CEO, Chairman, Management and Board - as close to verbatim as possible!

    CEO - "We will be the next biggest global healthcare company to come out of Australia."
    "We are not running this company for the next quarter, next year or the next few years we are running this company for the long term."
    "Once we introduce multiple products we will have a huge audience looking at us."
    "Having the best technology in itself does not guarantee success. It is all about the people."
    "We have laid the foundation and platform for solid growth."
    "We are not a technology company we are a solutions company."
    "We are very confident that the best is yet to come."
    "There is always a budget for mandatory technology."
    "We have an internal measure - we have a say it to do it ratio of 1-1."

    Chairman "The likes of Steven Sargent and Steven Farrugia did extensive due diligence before joining the company. They got an access all areas look behind the curtain and liked what they saw. They have joined us because they believe in and can see the potential we have."
    "We are on the threshold of greatness."
    "Unlike Apple we will be able to well invest our shareholders money for the future."

    Steven Sargent - "I am very optimistic about the future of Nanosonics."

    In summary - my view only - We have first mover advantage and are going to sew this thing up. I am very pleased to be a shareholder and super excited about our future potential. I cannot think of another company on the ASX that offers this sort of growth profile, quality management, competitive moat, financial position, quality recurring earnings stream, is only really getting going and is profitable. Not financial advice and DYOR.
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