Trinity Biotech plc (TRIB) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Trinity Biotech Second Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame. Please go ahead.

Thanks Brandon. Thank you for joining us to review the financial results of Trinity Biotech for the second quarter of calendar year 2017, which ended June 30, 2017. With us on the call representing the Company are Ronan O'Caoimh, Chief Executive Officer, and Kevin Tansley, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements, subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides the Safe Harbor for such forward-looking statements. The words, believe, expect, anticipate, estimate, will, and other similar statements of expectation identify forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, but not limited to, the results of research and development efforts, the effects of regulations by the United States Food and Drug Administration and other agencies, the impact of competitive products, and product development commercialization and technological difficulties, and other risks detailed in the Company's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect management's analysis only as of today. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer, for a review of the results. After Kevin's remarks, we will hear from Ronan O'Caoimh on his review of the quarter, after which we will open the call for your questions. Kevin?

Thank you very much, Joe. Today I'll take you through the results for quarter two 2017. Starting with our revenues, total revenues for the quarter were $25.4 million, which is 3% lower than in quarter two of 2016. As you will see from the table in the press release, our point-of-care revenues decreased by 9% whilst clinical laboratory revenues decreased by just under 2%. However, when the impact of the products culled that we announced in quarter four last year is taken into account, underlying clinical laboratory sales rose by approximately 2%. Ronan will provide more details on revenues for the quarter later in the call, so I'll move on now and discuss the rest of the income statement. Our gross margin this quarter was 42.5% compared to 45% last year. This reduction is partly due to a less favorable sales mix this quarter. We had lower sales of higher margin point-of-care revenues, at the same time with higher instrument sales which tend to have significantly lower than average margins. In addition, we are also seeing some carryover impact from the U.S. dollar strength on distributor pricing, a factor we would have mentioned in the last number of quarters. Finally, revenues were lower this quarter than in quarter two 2016, and this has had an impact on gross margins given the fixed nature of the Company's cost base. It should be said however, that whilst we've seen a reduction in gross margins this quarter from 45% to 42%, [indiscernible], it does represent an improvement on the margin we reported in quarter four 2016 of 40% and quarter one this year of 42%. Moving on to our indirect costs, our R&D expenses are $1.3 million this quarter, consistent with quarter two 2016. Meanwhile, our SG&A expenses decreased to $7.6 million, compared to $7.8 million last year. This reduction is largely due to lower discretionary sales and marketing expenses, particularly in relation to Meritas prelaunch costs, which were incurred in quarter two 2016 but which were not replicated this quarter. Operating profit for the quarter was $1.8 million compared to $2.4 million in quarter two 2016. This reduction is largely attributable to the combined impact of the lower revenues and lower gross margin, which I mentioned earlier, that was helped by the reduction in indirect costs this quarter. Moving on to our financing costs, which includes the impact of the Company's exchangeable notes, our financial income for the quarter was $196,000 versus $223,000 in the comparative period. This slight decrease reflects lower cash deposits post our share buyback. Meanwhile, financial expenses for the quarter were $1.2 million, which is consistent with quarter two 2016. The vast majority of this relates to the cash interest element of our exchangeable notes. Similarly, the non-cash financial income of $200,000, which has been separately disclosed further down the income statement, also relates entirely to our exchangeable notes, with a gain of $400,000 recorded for the change in the fair value of derivatives embedded in the notes, partially offset by non-cash interest of approximately $200,000. This compares to non-cash financial income of $0.8 million in quarter two 2016. Our tax charge for the quarter was $200,000, and this represents an effective rate of 9.6% after adjusting for certain nominal items which currently do not attract tax. The net result for the quarter is a profit after tax of $900,000. However, excluding non-cash items, the profit for the quarter was approximately $700,000. This compares to $1.3 million in quarter two 2016, or represents an increase of $500,000 when compared to quarter one of this year. The basic EPS for the quarter was $0.041 per share, whilst the EPS adjusted for non-cash items is $0.031. Fully diluted EPS is $0.068 and this compares with $0.085 in the equivalent period last year. Earnings before interest, tax, depreciation, amortization and share option expense, for the quarter was $3.3 million. Before I leave the income statement, I would like to say that over the last couple of quarters we have made some progress with respect to profitability. Revenues have increased, gross margins have improved, and we have controlled our indirect costs. The result has been that our operating profit has improved from $600,000 in quarter four last year to $1.3 million in quarter one and now $1.8 million this quarter. However, we still have a significant way to go and the key to maintaining this improvement will be to grow our top line revenues. I will now move on and talk about the significant balance sheet movements since the end of March 2017. Property, plant and equipment have increased by $0.3 million. This was due to additions of $700,000, being offset by depreciation of $400,000. In the same period, our intangible assets increased by $1.4 million. This was made up of additions of $2.3 million, offset by amortization charges of $0.9 million. Moving on to inventories, you will see these have increased by 3% to $33.6 million. I have slides and expected the increase in our inventories in the last earnings call, and it is mainly caused by the buildup in inventories for the peak client season and the growth of our Premier business. Meanwhile, trade and other receivables have increased by $2.2 million to $24.9 million. Cash collections from customers have remained strong and the increase is mainly due to an increase in customer billings this quarter given the increase in revenues from $23.5 million in quarter one to $25.4 million this quarter. Meanwhile, our trade and other payables, which includes both current and non-current payables, have increased from $21.6 million to $23.2 million. This increase is due to the timing of raw material purchases and vendor payments, offset by approximately $700,000 related to the closure of the Swedish cardiac operation, including redundancy payments. Finally, I will discuss our cash flows for the quarter. Cash generated from operations for the quarter were just under $3.4 million. Meanwhile capital expenditure for the quarter was $3.2 million, which is a significant reduction from the $6 million in quarter two last year, obviously due to the elimination of the Meritas expenditure. Now it should be noted that this level of decrease was so pronounced due to the fact that quarter two's capital expenditure was the highest recorded last year, given the state where the Meritas project was at, at the time. The other major cash movements this quarter were share repurchases of $3.1 million, the biannual loan note interest of $2.3 million, and once-off costs of $700,000. So this quarter, before the impact of interest and share buyback and once-off items, we are seeing positive cash flows being generated of approximately $0.25 million. Whilst this is relatively modest, it compares to a negative cash outflow of $3.8 million in the equivalent quarter last year and also shows the extent to which the cash generative position of the Company has changed since last year. In terms of total cash, the net result this quarter is that we had a decrease in cash of approximately $5.9 million, bringing the quarter end cash balance to $64 million. I will now hand over to Ronan.

Thank you. I am going to review our revenues for quarter two before opening he call to a question-and-answer session. Our revenues for quarter two were $25.4 million, compared with $26.3 million in the corresponding quarter last year, which is a reduction of 3%. Our point-of-care revenues were $4.4 million, compared with $4.8 million in the corresponding quarter, which is a decrease of 9%. Clinical laboratory revenues were $21.1 million, compared with $21.5 million in the corresponding quarter last year, which is a decrease of 2% or $400,000. The impact during the quarter of the cull of our MicroTrak and Bartels infectious disease products amounted to $800,000, while the negative impact of currency movements while greatly reduced still amounted to $150,000. Absent these two factors, our clinical laboratory business demonstrated organic growth during the quarter of 2.6%. Moving back to point-of-care, our revenues decreased this quarter by 9% when compared to the corresponding quarter. Our U.S. HIV revenues decreased 10%, and this is explained by the fact that public health spending in the U.S. on HIV continues to decrease. Moving on to Africa, our HIV sales decreased by 7% when compared with the corresponding quarter. However, we do not believe that either the market or indeed our market share have diminished. We believe that this movement is consistent with the haphazard nature of NGO purchasing. Moving back to clinical chemistry, I indicated earlier that our revenues have reduced by $400,000 during the quarter when compared with corresponding quarter last year. This is entirely explained by the impact of the cull of our MicroTrak and Bartels products, which had an impact of $800,000 during the quarter. And I also indicated that the negative impact of currency movements amounted to $150,000 during the quarter, giving the rise to an organic growth rate of 2.6% when these factors are eliminated. Moving on to infectious disease, our revenues declined 15% during the quarter when compared with prior year revenues. 12% of the 15% reduction arises due to the cull of the MicroTrak and Bartels products, with 3% of the reduction arising from the rest of the infectious disease business. Our Lyme revenues in the U.S. performed well, as did our business is China. However, our revenues in Brazil, Russia, Turkey and Colombia, to mention a few, continue to suffer due to the weakness of these currencies against the U.S. dollar. Our diabetes and hemoglobin variant business performed really well during the quarter, with revenues increasing 10%. We had strong instrument placements in all of our principal markets and placed a total of 83 instruments during the quarter, compared with 68 instruments placed in quarter one. The exception was Brazil where we made modest placements despite strong demand. This arises due to the weakness of the Brazilian Real. However, we plan to re-enter this market when we increase our level of manufacturing activity in Brazil, thereby saving on import duties, saving on sales taxes, and creating a natural hedge. We expect to achieve this enhanced level of the manufacturing in quarter one of 2018. Moving on to autoimmunity, this business performed well during the quarter with a 6% revenue increase. We have consistently grown this business since its acquisition and believe that it will be a real growth engine for the Company. The reference laboratory business has been the best performing part of the business with significant growth coming from our Sjogrens test and from the growth of our business with the two U.S. mega labs. However, the greatest potential for our autoimmune business is in the product revenue side, where we continue to expand our instrument offering in both the U.S. and across the world. And we believe that with this added to our best-in-class Immunofluorescence and ELISA product range, we'll continue to deliver double digit growth in our autoimmune business. So in summary, when all of the components are taken together, we believe that we can achieve mid single-digit organic growth in our business during this year, and that this growth rate can accelerate into a double-digit growth rate in 2018. So I'll now open the call to a question-and-answer session.

[Operator Instructions] The first question comes from Larry Solow with CJS Securities. Go ahead, sir.

Just a follow up on sort of the mid single-digit organic growth expectation, I think which really hasn't changed much for this year, in the first half if we sort of take out the culling activity and a little bit of currency impact, you were about flat I guess, right, on the first one, not just the quarter but on the first half of the year. So, does that imply an acceleration in the back half to sort of get to this mid single-digit or are you just saying mid single-digit in the back half? I'm just trying to sort of how you parcel that out.

No, we are saying mid single-digit for the entire year.

So that implies that you're going to certainly grow in the back half of the year even with the culling activity, right, because the culling [indiscernible]?

I mean I think quarter one is traditionally our weakest quarter with zero Lyme sales. So you would expect that the first six months would be behind the second six months.

Right, okay. And just on the outlook, just for a couple of things, on the HIV side, a little down, and I know just in general it seems just like the quarterly volatility, but is the NGO purchasing maybe not in any given year could even be volatile but is that generally growing at least modestly and then what's the – any update on your potential entry into the frontline screening market?

I mean you may have seen that there was a WHO report on HIV earlier today and it talks about enhanced levels of testing, enhanced levels of – including HIV positives on to antiretroviral treatment, and the WHO 90–90–90 program and all of that. So, I do believe that HIV testing is growing in Africa as basically more and more people are put onto antiretroviral treatment. I think the fact that we would be down this quarter is really just, it's just part of the haphazard nature of the ordering with NGOs. Just in terms of where we are with Trin-Screen and we are in trials at the moment with Trin-Screen. We have to obviously get the product approved by the WHO. It's going to take somewhere between probably 9 and 12 months to get there, but the product is finished and it's excellent. And just to mention something else, you would have seen that one of our competitors signed a deal for a self-testing in Africa and around the rest of the world with the Gates Foundation, and I mean we would look upon that as a very positive development and an exciting one. Self-testing can work very well with our new Trin-Screen screening test. And so we look at that very positively and I think that can open up the potential new market for us. And obviously our competitor product uses oral fluid, so it's a saliva test, and our existing confirmatory test would use, requires too big of a sample. It needs about 50 microliters to basically work with them, which that's interesting I think, for self testing, but I think the Trin-Screen test would work very well. And obviously we could be very competitive price-wise comparatively with our competitors. So, we see that as a very positive development and we are quite excited by it.

Okay. And then sort of the target or to maybe get even kind of accelerated growth next year into double digits, what will be the drivers of that acceleration?

I think you have seen for example that this quarter we got 10% of our diabetes and variant business and we got 6% out of autoimmunity, which actually was a bad quarter in the sense that we typically have been getting 7% or 8%. [Indiscernible] a lot of catalysts within autoimmunity to get us into double-digit. And I think we can get it in HIV and the whole rapid sized through a combination of the Trin-Screen product and various things that are happening within the African market for us at the moment in particular countries. So, basically through a combination of expanding our confirmatory business and opening up a screening business, I think that we can deliver double-digit growth in our HIV business, that point-of-care business. And that leaves us basically with an ever diminishing infectious disease component of our overall business, which would probably continue to be probably to shrink very marginally.

Okay, great. Thank you.

Our next question comes from Nicholas Jansen with Raymond James. Go ahead.

I just want to dig a little bit deeper into the organic growth acceleration. I know you guys just hit on it, but in the first half of the year 2%, that would mean to get to mid single-digits in 2017 you would have to be high single-digits, and I don't view the infectious disease headwinds abating anytime soon, I don't think the HIV confirmatory dynamics are going to change overnight. So I'm just trying to get a sense of why set expectations to levels that I don't think your current stock would suggest that you are trading at. So in terms of how we should be thinking about the business looking at the revenue growth, what's the factor of setting pretty high expectations for double-digit next year when this business hasn't grown double digits I think in multiple years? Thanks.

I think what we are talking about, we are talking about achieving in this year is mid single-digits, which regard that as sort of 5% and off a base of I think $96.6 million will get you to around $101 million, and we're at $49 million so far. And I do believe given that quarter one is historically our weakest quarter with virtually no Lyme sales, I think this is achievable. And I would just mention to you for example that when we culled the MicroTrak and the Bartels business, that we culled business that had diminished by 17% last year, so that headwind have been removed. And in addition to that, you would have seen that there's been largely a stabilization of kind of the dollar strengthening. In fact if anything, there's been marginal weakening, and of course that basically eliminates another headwind and could even marginally be turning into a bit of a tailwind at the moment. On top of that, I believe that we are gaining momentum with our variant business – I'm sorry, our Premier business is doing very well, but the variant component with the launch of the Premier Resolution is giving us new momentum there. And in addition to that, our Immco autoimmunity business is growing, and I think we are accelerating that growth rate. I think you're beginning to see that. I think we have a combination of those factors and it makes basically 5% growth this year achievable and double-digit growth, clearly low, very low double-digit growth but double-digit growth in 2018 achievable too, particularly as we launch our Trin-Screen HIV product and indeed the malaria product that would accompany it.

Okay, that's helpful. And then secondly, looking at the diabetes franchise, it clearly is growing quite nicely. Can you talk about the pull-through of instruments, are we still lagging there a bit and how we think about the ultimate pull-through of some of these Premier Resolution placements? Thanks.

I mean we've just done I think a good quarter I think with 83 instruments this quarter, and they are all new instruments. We haven't replaced any existing ones. So that's all new business. So I think that's very encouraging. That's upfront I think 68 in quarter one. And bear in mind that that's being achieved in an environment where we are not really placing anything on, virtually negligible placements in Brazil. So, I think we are really bullish and optimistic about both our Premier placements in the diabetes section and also our Premier Resolution placements in the variant market.

Our next question comes from Jim Sidoti with Sidoti & Company. Go ahead.

So one question, it seems like you've got fairly substantial amount of things on your plate between the HIV screening test getting up and running, and costs coming down from the consolidation to the Swedish facility, but what about acquisitions? You have talked about them in the past, you haven't said anything lately. You've still got about $60 million on your balance sheet. Do you think you will look for inorganic opportunities as well or do you think you will focus on your organic opportunities?

I think our primary focus is on demonstrating an ability to grow this Company in double digits and to do it in the short term. Having said that, we are not entirely closed to acquisitions and if we can find the right acquisitions that would have compelling synergies then we would do it. But our quest for acquisitions has fundamentally changed since the events that happened in Sweden a number of months ago in Autumn, and at that point in time we were open to looking into new niches and to acquire into such niches. I mean now that would not be our approach. Our approach would be very much if we were for example to find a compelling acquisition with multiple synergies in infectious disease, in autoimmunity or indeed in diabetes, we would consider it, but only in such circumstances. So it would only be basically if we were acquiring something that was immediately earnings enhancing that has multiple synergies both on the manufacturing and as a marketing sense and returning to [indiscernible] and at stabilized multiples, then we would actually do it. And so I think we are much more selective, but yes, we are looking but we have a much tighter focus.

So just to be clear, your outlook for possibly getting to double-digit growth next year, that does not include any acquisition activity?

Right [indiscernible]. So yes, to be really clear, Jim, when we talk about double-digit growth, we are talking organic and looking toward acquisitions.

All right and does that assume that Brazil is up and running and that the HIV screening test is approved or does that not include those?

I mean Brazil will be up and running the end of quarter one, that's fairly straightforward. And HIV screen is slightly different in the sense that it's not completely in our control. [Indiscernible] WHO waiting list actually to wait for the inspections. But I think we're reasonably confident that we will achieve it in quarter three, possibly end of quarter two of 2018, I mean [indiscernible] minor impact towards the end of the year.

Okay, all right. Thank you.

[Operator Instructions] Our next question comes from Wesley Don with Senvest. Go ahead.

Could you guys just walk me through cash burn for the quarter and also break down for me the components of PP&E and what capitalized R&D was?

Okay, no problem at all. First of all, the breakdown of the PP&E and the intangibles, you are talking roughly about $1 million in relation to PP&E, just under $1 million for that, and then the balance in terms of cash then will be about $2.2 million, between $2.2 million and $2.3 million. In terms of then discussing the cash burn for the quarter, I mean you will have seen from the press release that roughly speaking our total CapEx, which takes into account both of those elements we just referred to there, were roughly equal to the cash generation from operations, cash generations from operations being broadly speaking EBITDA, small amounts of interest on tax which is actually a small receivable, we're facing them for the first time in a number of quarters, we have positive cash flow before you take into account the interest and share buyback and once-off costs. Now those amounts were quite significant this quarter. First of all, you have got the interest payment, but that's a bit of a distorting factor because what you are seeing in one quarter is six months of interest. So I wouldn't be sort of extrapolating that as such. The share buyback, obviously the function of the shares that we are buying and that's probably slightly higher than some other quarters we have had and the $700,000 of costs are in relation to the closure of our Swedish facility, and that would have included some redundancy, basically speaking pretty much the last of the redundancies payments that we've made up there. So you can see the fact that our cash did come down by close to $6 million, but most of that was share buyback and the exchangeable notes interest, which again I stress was six months' worth.

This concludes our question-and-answer session. I would like to turn the conference back over to Ronan O'Caoimh for any closing remarks.

I'd just say, thank you very much for your attention and support and we look forward to speaking to you at the next conference call at the end of quarter three. So, thank you. Goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.