The Nanosonics Ltd (ASX: NAN) share price has sunk as much as 16% this morning after announcing it would renegotiate its contract with major distributor GE.
The business also expects to report revenue a 41% jump in revenue to $60.6 million for the first half when it releases its result on February 22.
Currently, the Nanosonics share price is down 8.53% to $4.61.
Keep up to date with the February 2022 reporting season calendar.
Nanosonics designs and manufactures infection prevent equipment for hospitals and healthcare applications.
Change up for final five months
Nanosonics announced it would renegotiate its sales contract with GE for the remaining five months to June 30.
Per the current sales model, GE purchases inventory from Nanosonics. Then it sells equipment such as capital devices and consumables to end-users.
The revised model will see GE consume its existing inventory. Meanwhile, Nanosonics will take charge of inventory, shipping, installing and training.
Nanosonics also transition all existing GE customers to its business for the sale of consumables.
“During this transition, both companies will have a focus on ensuring a positive customer experience with no disruption in continuity of customer supply”
Why change the contract?
GE and Nanosonics are currently in the process of a new seller agreement from July 1 onwards.
It is expected that the new agreement will involve Nanosonics taking a larger role in selling and distribution.
Subsequently, GE wants to reduce its inventory of Nanosonics products before the contract is up.
Otherwise, it could be left with excess inventory it’s unable to sell.
Why did the Nanosonics share price drop 16%?
As a result of the transition to a new sales model, Nanosonics expects a $13 million to 16 million fall in FY22 revenue.
Consumables, which make up 80% of GE’s sales, will be unaffected.
However, capital sales of devices are expected to be impacted, leading to the revenue revisal.
While it’s a short term hit, the revenue drop has little to do with the underlying business. Rather, it’s a timing difference between purchases.
Going forward, the Nanosonics share price will benefit from reducing its reliance on GE for sales support, opting instead to insource its sales team.
The business will hire additional sales staff with a cost of $1 million in the second half.
By the start of 2022, Nanosonics will have a direct North American sales force of 100 staff.
“This sets up the organisation for ongoing success as we continue to grow our trophon franchise and plan to introduce new products to market”
