NANOSONICS LIMITED — AGM Information 2019

Nov 17, 2019

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Nanosonics Limited 2019 Chairman’s Address Annual General Meeting

Monday, 18 November 2019

Studio Rooms, Four Seasons Hotel, 199 George Street, The Rocks, NSW 2000

Introduction

Good morning ladies and gentlemen. My name is Maurie Stang, and it's my pleasure to welcome you to the Nanosonics 2019 Annual General Meeting.

Nanosonics’ growth and success is driven by our people, our culture and our leadership team. The key outcome has been a company that has proven and balanced capability across all drivers of shareholder value…shareholders, customers, employees and importantly, the broader community. Specifically, we have demonstrated a capability to innovate, manufacture, obtain international regulatory approval and successfully market our products on a global basis.

During our journey we have been committed to the principles of E.S.G. It wasn’t called ESG when we started but we have always lead this business by ‘walking the walk’. Your Company’s initial vision was to replace harmful and toxic chemicals with environmentally friendly solutions and that focus remains in every dimension of the business.

From a societal point of view, we deliver improvements in healthcare outcomes driven by innovative technology, more efficient processes and a safer environment.

Governance relates to more than just oversight, it is carried through in every dimension of Nanosonics relationships with its team, its suppliers, customers and indeed shareholders.

I am proud to note that Nanosonics is now in the top 150 companies on the ASX and is considered to be the emerging leader in low temperature instrument reprocessing as well as being highly regarded by infection control societies and experts around the world.

Building on this platform of partnerships, trust and performance, your company has before it a virtually limitless future as we pursue innovative solutions for users of our products. Our outstanding R&D program is the engine of our future growth and I believe it to be second to none in its capability and targeted outcomes.

This past financial year has been one of great achievements and significant delivery on our strategic growth agenda to further position Nanosonics as a global leader in infection prevention.

The most exciting element is that we are only realising the beginning of the opportunity ahead of us in a global infection control market which, we estimate is valued at over $70 billion per annum and we also estimate is growing at around 8 percent per annum.

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In the US, our largest market, we are in over 5,000 hospitals and healthcare facilities, including all of the top 100 hospitals. Globally, in FY19, the trophon installed base grew 18 percent and by the end of June there were over 20,000 units performing approximately 70,000 daily cycles. That means 70,000 people are protected from the risk of cross contamination every day by trophon.

Our team continues to build an expanding ecosystem around ultrasound probe reprocessing whilst working on new innovations that target significant unmet needs of our global healthcare customers.

Key 2019 highlights

FY19 saw Nanosonics again deliver an impressive financial result, with a 39 percent increase in revenue to $84.3 million and a 201 percent increase in operating profit before tax to $16.8 million. Importantly we delivered a return on invested capital of around 15%, well in excess of our cost of capital. This is even more noteworthy given our expanded investment in R&D, operational capability, and global marketing and sales expansion.

These strong financial results, together with the positive market sentiment, is highly indicative and supportive of your company’s growth prospects. Clearly, shareholder value has grown well beyond that of Nanosonics market peers with the Company's market capitalisation reaching $2.0 billion in recent times.

Our new trophon2 product, which is the next generation trophon technology, was launched in the key global markets of North America, Europe and Australia. It continues to receive very positive customer feedback and adoption.

The trophon2 also received industry recognition for its outstanding design and innovation in July this year when it won a prestigious Australian Good Design Award Gold Accolade.

In August 2019, our innovation program was recognised as being amongst the most innovative in Australia and New Zealand, ranking seventh in the Australian Financial Review Boss, Most Innovative Companies Health Industry List.

In terms of our product pipeline, we are continuing with a significant focus on internal development. In parallel, we have made investments in both people and new programs, which will underpin our capability to commercialise technology in terms of internal development as well as other external opportunities for sourcing.

We remain encouraged by the progress of our product development pipeline, and preparations for launch are underway for a new product where we are targeting the commercial introduction to commence in FY21 and launch in a number of international markets throughout the first half of FY21 (subject to individual market regulatory approvals).

The Nanosonics team continues to grow and strengthen in capability to support the growth of our global business. We now have 301 people throughout Australia, the United States, Canada, Europe, Middle East and Japan, an increase of 68 people - or 29 percent from this time last year.

As we accelerate our next phase of growth, I'm pleased to welcome four new executives to the management team. Each joined us during the year and greatly strengthens the team in a number of important areas including leadership in APAC and EMEA, strategy, operations and marketing. Michael now has the ‘bench strength’ to pursue an ambitious agenda whilst ensuring that our strength of execution remains our strongest asset.

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Healthcare Acquired Infections (HAIs) - why Nanosonics' work matters

The Nanosonics promise is 'Infection Prevention. For Life' and our goal is to reduce the spread of healthcare acquired infections, or HAIs. So why is this important?

HAIs have an enormous impact on patients, their families, and our hospitals and care facility resources. They are the most frequently occurring adverse event in healthcare worldwide with a prevalence of 7.6 percent amongst hospitalised patients in high-income countries.1

In Australia, a recent study has shown hospital HAI prevalence rates range from 5.7 to 17 percent with a median of 9.2 percent.2 Imagine going into hospital knowing there's a one in ten chance you could acquire an infection that's not related to what you actually went in for.

Capital Management

An outstanding dimension of Nanosonics has been its ability to execute while growing its cash reserves. Your Board continues to believe that the Company’s financial strength and ability to generate cash is a competitive advantage that drives shareholder value.

We are accelerating investment in our global expansion and further investing in resources to increase our share of existing markets. One such example is the important North American market where today we have achieved over 40 percent penetration based on our calculations. In parallel, we are well positioned to provide technology products and services to help our customers meet the significant global healthcare challenges associated with infection prevention outcomes.

Research and development is a core focus for Nanosonics and frankly one of our competitive advantages. Our current innovation program and investment is the largest in the Company's history. In FY19, we invested $11.4 million on R&D. We anticipate increasing this to around $15 million this year so we can continue to enhance our core technologies and progress the development of new platforms to address these large-scale new opportunities.

The Board regularly reviews our capital management strategy and, at this time, we believe our cash reserves, which at the end of June were $72.2 million, are best applied to supporting investment in our strategic growth agenda.

Board

I’m immensely grateful to work with a board who are highly regarded leaders in many fields and have a level of commitment which is truly second to none. On 17 July, we appointed a new director, Mr Geoff Wilson. Geoff brings considerable finance, audit and risk management experience, as well as current and deep experience in the important Asia Pacific markets where Nanosonics plans to expand.

In addition to Geoff, we are very pleased to confirm that Lisa McIntyre will be joining the Nanosonics Board effective 13 December 2019. Lisa brings a very valuable mix of deep healthcare expertise combined with strong commercial experience. I am looking forward to the very important contribution that Lisa will make to the Nanosonics Board.

2019 also saw the retirement of a longstanding director, Mr Richard England. I want to take this opportunity on behalf of the Board, management and shareholders to acknowledge Richard who stepped down on 31 August this year. We thank Richard for his significant contribution to Nanosonics’ story. In his capacity as Chair of the Audit and Risk Committee, he provided valuable insight and guidance during a time of both high growth and rapid change.

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Governance

In a regulated industry, Nanosonics' business activities depend on robust risk management and quality systems. We are highly committed to our Environmental, Social and Governance principles and have strengthened our reporting on these principles this year.

You'll see the details in this year's expanded ESG section of the Company's Annual Report. I won't go into all of those details here but one topic I would like to cover is diversity, the value of which is felt and fostered at all levels within the Company. Our commitment to diversity in all its forms remains proactive across all of the Company’s activities.

At June 30, women represented 36 percent of the Nanosonics workforce with 30 percent in senior management positions and 17 percent at Board level. With the appointment of Lisa, this number will increase from 17 percent to 28 percent at Board level. We're setting measurable objectives for the ongoing program of achieving gender representation across all levels of the organisation.

As set out in our report of ESG-related activities, Nanosonics has a program of social investment in the communities in which it operates and in recognition of the real value in making money out of doing good for all of its constituencies.

Every dimension of our processes seek positive environmental outcomes, our products deliver significant eco-friendly and tangible benefits whilst driving best practice. We are committed to minimising our impact on the environment wherever possible. The Company has several active programs of giving to a variety of causes and we support staff to take part in charity events, volunteer programs and workplace giving.

Conclusion

I feel privileged to be a part of the Nanosonics journey and excited to report that whilst reflecting on our past achievements we are fully focused on the future. Our core trophon ecosystem has a global installed base that is growing strongly. This will continue as the fundamentals for adoption grow with the introduction of new guidelines and increasing awareness of the importance of high-level disinfection of semi-critical ultrasound probes.

There is still significant opportunity in terms of global market penetration, and we have a number of active programs to grow our presence in high potential geographies. On top of installed base growth, we have an even faster growing annuity revenue from sales of consumables and service. Our new product pipeline and increased capability in every dimension of the business presents excellent future possibilities.

Each and every person in the Nanosonics team plays a crucial role in your Company's success. I whole-heartedly congratulate them for the past year's achievements and thank them for their efforts and dedication, which on many occasions still reflects the excitement and passions of a start-up company with the discipline of an emerging market leader.

All of this would be impossible without the supportive relationship of our investors, brokers and analysts, board members and above all team Nanosonics.

In our Annual Report 10 years ago in 2009 - the year of Trophon’s launch in Australia, our focus was on the innovative delivery of better healthcare outcomes, all within the context of superior workflow occupational workplace health and safety and a new standard of environmentally friendly technologies.

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Today I can proudly say we remain committed to these principles whilst lifting our gaze to far greater and more ambitious horizons in terms of forward-looking business plan. I can confidently commit to our belief that the best is yet to come.

I would now like to invite the Company’s CEO and President, Mr Michael Kavanagh to deliver his presentation. Michael has served as CEO for the past six years and, under his outstanding leadership, Nanosonics continues to go from strength to strength.

END

1. Currie K et al. American J Infect Control. 2018,46(8):936-42.

2. Russo PL et al. Antimicrobial Resist Infect Control. 2019(8).

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