INTERVIEW WITH MR. KEVIN MCGUINNESS, GROUP CHIEF EXECUTIVE OFFICER OF ELLEX MEDICAL LASERS LIMITED (ELX)

“FY08 Full Year Results”

http://www.brr.com.au/event/50737

TUESDAY, SEPTEMBER 2, 2008, 4 PM.

            BRR    Good afternoon and welcome to Boardroom Radio. Today, we’re speaking with Mr. Kevin McGuinness, CEO of Ellex Medical Lasers Limited. Thanks for

10                    joining us today Kevin.

            ELX     Thank you. Thank you for the opportunity.

BRR    Kevin, Ellex has again demonstrated a strong revenue growth in a difficult environment, what were the key drivers of these and how’s Ellex now

15                    positioned in the various markets?

            ELX     Well, we achieved 38% in growth in revenue in FY08 which considering the trading environment that we’ve been is a reasonably credible performance, and we continue to benefit principally from the strategies that we’ve been implementing over the past three years. The key strategies that we’ve been

20                    implementing are the investment in establishing our brand and our sales and distribution channels around the world, the development of our new products, and today, we have one of the most complete product lines in the ophthalmic label market, and the strategic acquisitions that we’ve undertaken, specifically the (inaudible) (00:00:58) product in the Australian distribution arm which we

25                    acquired some 18 months ago.

We’ve continued to see strong performance from our direct sales channels in Japan and Australia, and particularly our distribution channelling growth in Europe. The Japanese performance is particularly impressive considering the

30                    ongoing headwind we’ve had from the strong Australian dollar.

In the US, our growth has been somewhat moderate. However, we’re in a different stage in our development of that market compared to the other markets. We’ve only just started to build that market in the recent financial

35                    year and most of the investment was made during the year, and therefore we didn’t have the full opportunity to see the impact of that investment in terms of growth and we expect to see traction and further development and growth in that market as we move in the FY09.

40                    So, we believe that overall, the year was a positive one in terms of generating revenue growth, and that we continue to take steps to strengthen our brand, strengthen our distribution. We now feel that we’re very well positioned, the strength that our product is offering, and our distribution means that we’re well positioned going forward. We believe that right now we’re the No. 2

45                    player in the ophthalmic laser market, and we have an emerging presence in the ultrasound market as well. So in relative to the size of our markets, we certainly see the US as one of the biggest growth opportunities for our business in the near term, but overall, we feel that you know, we’ve achieved very well in the last 12 months.

            BRR    Kevin, now, you’ve not been able to translate the revenue growth through the bottom line, why is this and what can be done about it?

ELX     The profitability has been hampered by a number of factors both inside and

5                      outside of our control. In terms of those that have been inside of our control, I think we’ve made some very conscious decisions to invest in our business and we’ve done that over the last three years and continue to do that last year, and that’s probably head our short term profitability, and most recently, the area that we invested in has been our US distribution channel. However,

10                    it’s also fair to say that the cost structure of our business that we implemented last year was aimed at a high revenue growth rate than we actually achieved, and as a result, our short term profitability was impacted last year, but I think there are also been some factors outside of our control. Foreign exchange rate is probably the most notable where we’ve seen a very strong Australian

15                    dollar against the Japanese yen and the US dollar, and also the broader economic conditions have been very difficult and I think that’s also led to and compounded what’s been a very competitive environment for our products out in the market.

20                    So, I think overall, there have been a number of factors that affected our profitability over the last twelve months. What we are focused on doing is addressing that in the next twelve months, and the things that we looking at doing over the next twelve months is refining our cost structure to meet these challenges and to probably meet a more conservative growth target over the

25                    next twelve months. We have a number of product cost reduction programs that we’re working on at the moment. We’re targeting a reasonably sizeable reduction in our product cost over the next three years, we started that program six months ago and we expect to see some benefits flow through this financial year.

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We expect to see the investment that we’ve made in the US house channels start to translate into higher growth rates, and therefore, grow the profitability and contributions from that market as we move forward. So we’ve got a number of initiatives currently underway that we believe will improve

35                    profitability. It’s very important though that we don’t lose sight of the opportunity we have as a business, and therefore, we need to ensure that we have a balanced approach as we move forward and not just a short-term approach but certainly getting the balance right between the long-term growth, and profitability is certainly a core focus of our management team

40                    right now.

            BRR    Kevin, Ellex has started its transitions with direct sales part from US, how is          this progressing?

ELX     Well, it’s actually progressing quite well. Today, we have six direct territory

45                    managers in the US. At the start of the year we had one in place so we’ve certainly made some progress in putting in place some direct representation in the market, and that is supported by (inaudible) (00:05:11) team independent representatives around the US. What we have focused on is selecting regions in the US where we believe we’ve been under-represented in the past and where we believe those regions have a substantial market opportunity for our products. Part of the six direct representatives that we

5                      now have onboard only joined us in the last six months of last financial year. So we’ve not yet seen the full benefit of the investment in those people and that channel, so far. It generally take somewhere between 3 to 6 months for a new territory manager to become fully effective in their market.

                        In Q4, we started the season traction and we’ve certainly seen that momentum continuing into Q1 of this financial year, so the signs are quite

10                    positive. We’ve got a very experienced management team in the US that’s ensuring that the infrastructure and its full mechanisms to manage our sales team are in place. We also have moving forward some exciting new product releases that have really been aimed at the US market and are going to strengthen our product offering in that key market.

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So, overall, we’re very pleased with the progress. We think that we’re seeing some positive signs as we move out of financial year 08 and into financial year 09, and the US does represent the largest market opportunity for our products, and so we’re very committed to developing that channel and

20                    ensuring that it grows and is profitable moving forward.

BRR    So what steps is Ellex taking to address high inventory levels?

            ELX     Certainly the growth in inventory has been the key drive in the growth of our revenue over the past three years. Our investment in markets like Japan

25                    where we’ve invested quite heavily and demonstration inventory has been one of the key reasons why we’ve been able to get traction in that market, however, we do recognize that the current level has been not acceptable. It’s certainly been the major reason why the business has generated poor operating cash flows. So it’s going to be key focus for us going forward.

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We have a team of people that are looking at a number of initiatives aimed to reducing inventory over the next 12 months, and they’re really going to focus on few core areas. The first is reducing our finished goods inventory around the group. We currently ought to think….we are not efficient in the way that

35                    we managed our finished goods inventory between the Adelaide factory and our distribution channels around the world, so we’re looking at more efficient ways of doing that.

Improving visibility and management of our demonstration inventory around

40                    the world is another way in which we can reduce inventory, and we’ve also got a number of initiatives aimed at improving stock turns out of the factory itself. We have set some very clear targets for our management team here to achieve over the next twelve months aimed at reducing inventory and improving inventory terms, and we expect to see some benefits from that

45                    floats through within the first six months of this financial year, and we expect that to continue through to the end of financial year itself.

            BRR    And lastly, Kevin, what do you see as the key objectives for the ’09 financial year?

ELX     Well, clearly and most importantly, profitability has to be our key focus for the next 12 months, both from an accounting and a cash perspectives. So that means that not only are we generating profitability from a profit and loss perspective but from an operating cash flow perspective were also a cash

5                      positive, and that really is our number one goal for the next twelve months. We do expect the challenging market conditions to continue through most of the next financial year, but we do believe also that we have the right plan to enable us to meet the goal in this challenging environment.

10                    Clearly, the US represents a significant area of focus for us in financial year ’09 as well, so seeing further traction and growth in that market and improving profitability out to that market is going to be a key goal for us over the next 12 months. We do have a number of new products that we’re targeting for a release in FY09. We have one major new laser product that we expect to

15                    launch at the American Academy of Ophthalmology this year and that product we believe will have a very attractive proposition in the US and Japanese markets particularly, and we believe that it’s going to be an important product in providing the full kickback for our sales reps in the US as we move forward. We also expect to see further product releases in the ultrasound area as well

20                    as we invest in developing that product. I think one of the other key elements for our business as we move forward over the next 12 months is Ellex 2RT, Retinal Regeneration Therapy, which is an exciting new technology that we announced to the markets some twelve months ago, and we believe that technology has very high potential for our business. So we will be continuing

25                    to invest in clinical trials for that product to better understand the full potential of it and we’ll be focusing principally on further extending the trial that we’ve started on diabetic macular edema, and we will also be expanding the trials into some early AMD trials and hoping to see those results coming through towards the end of financial year so that we can then determine what the right

30                    commercialization parties of that product.

BRR    Kevin, certainly it does sound promising. Thank you for your time today and we look forward to speaking to you soon.

            ELX     Thank you very much.

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BRR    That was Mr. Kevin McGuinness, CEO of Ellex Medical Lasers. If you have any questions about this broadcast or any other broadcasts, please feel free to contact us on brr@brr.com.au. I’m Eddie (indiscernible) and thank you for listening to Boardroom Radio.

INTERVIEW CONCLUDED

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