Trinity Biotech plc (TRIB) Q4 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Trinity Biotech Fourth Quarter and Full Year 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. At this time, I would like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead, sir.

Thank you, Denise, and thank all of you for joining us to today to review the financial results of Trinity Biotech for the fourth quarter and full year 2017, which ended on December 31, 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. But 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, anticipates, 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 effect of regulations by the United States Food and Drug Administration and other agencies, the impact of competitive products, 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, 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 and the year. After which, we’ll open the call for your questions. Kevin?

Thank you very much, Joe. Today, I'll take you through the results for quarter four and then results for the full year 2017. You will note that there are some impairments and once-off charges which are being recognized this quarter, which I will discuss in the detail at the end of the income statement segment. In the meantime, the metrics I quote exclude the impact of these items. I will begin with an outline of the results for the quarter and then move on to the results of the year as a whole afterwards. Beginning with our revenues, total revenues for the quarter were $24.6 million, and this compares to $23.7 million in quarter four of 2016, thus giving an increase for the quarter close to 4%. Ronan will provide more details on the revenues for the quarter and the year as a whole later in the call. So I'll then move on and discuss the other aspects of the income statement. The gross margin for the quarter was 41.5%, compared to 40% last year. While this represents an improvement in the comparative periods, it is lower than we would have seen in more recent quarters. And this is due; firstly, to the ongoing impact of exchange rate move impact on distributor pricing which is something we would refer to speaking of before. And secondly, there is the impact of Infectious Diseases sales to China, which have significantly lower margin than average. China being a lower priced market and also one in which we sell through our distributor as opposed to in the U.S. where we sell directly on hands to earn better margins. Moving on to our indirect costs, our R&D expenses for the quarter of $1.5 million was higher than the $1.3 million we reported in 2016. However it is consistent with more recent quarters this year. Meanwhile, our SG&A expenses have increased from $7.2 million to $7.6 million, this is an increase of approximately 5% and is due to higher amortization charges, felt the impact of inflationary pressures on both wages and overhead. This is in part due to the strong economic environments particularly with regards to healthcare employment in a number of locations in which we operate. In summary, this quarter we’ve had higher revenue and improved gross margin while the effect of these two factors have been partly offset by higher indirect cost and net outcome that we have grown operating profit for the quarter from $600,000 to over $800,000. Moving on to our financing cost which includes the impact of the exchangeable note, our financial income for the quarter was $224,000 which is virtually identical to the same number last year. Similarly, financial expenses were also started at $1.2 million of which $1.15 million relates to the cash interest charge on our exchangeable note. Our non-cash financial income which is disclosed further down the P&L was just over -- just under rather $500,000 consisting of a gain of close to $700,000, arising on the fair value of the derivatives embedded in the note partially offset by $200,000 of non-cash accretion interest again relating to the note. You will have seen in the press release that we quote EPS without non-cash amount and it is these net amounts of $500,000 which we are excluding. The profit after tax for the quarter again excludes these non-cash items was $900,000. This compares to virtual, the breakeven position last year. I will say that has been significantly impacted by a favorable tax charge caused by the new tax laws introduce in the USA in December, which I’m sure you’re all familiar with. Whilst these changes have not significantly impacted our direct, our cash base tax charge for the period, the reduction in tax rates did reduce the level of deferred tax liability that we’re acquired to recognize. The basic EPS excluding non-cash and four once-off items was $4.02 per ADR and this compares favorably to the $0.002 reported in quarter four 2016. Meanwhile, fully diluted EPS which is some way the superior major nearly doubles to $0.077 compared to $0.043 last year. Earnings before interest, tax, depreciation, amortization and expenses for the quarter amounted to $2.4 million. I will now make some comments on the full year results. Annual revenues decreased marginally from $99.6 million in 2016 to $99.1 million for the financial year 2017. As I mentioned earlier, Ronan will deal with this later in the call. Gross margins for the year decreased from 43.3% to 42.3% which represents a drop of 1%. And in this regard, you are seeing the factors that we saw earlier impacting the quarter mainly the impact of exchange rate on distributor pricing and profit makes particularly in relations to Chinese versus U.S. sales in Infectious Diseases products. Overall, indirect cost increased by 1.9% with the increases in R&D and SG&A expenses for the year due partly offset by a reduction in share base payment. The net resulted that are offer in profits for the year was $5.5 million, which was down from the $7.5 million in 2016. This reduction is a direct result of the lower gross margin and higher SG&A cost I mentioned earlier. Financial income for the year was slightly lower at $800,000 those reflect in the lower level of cash, which we had on deposit during the year. Meanwhile financial expense which is essentially is a cash interest charge associated with our exchangeable notes was as expected static year-on-year at $4.7 million. In addition to this, there was several non-cash financial income of $1.7 million recorded during the year. Result as a profit after-tax for the year was $2.3 million down from $3.6 million last year. As was the case with operating profit, this reduction was due to cumulative effect of lower revenues and gross margins and higher indirect costs, factors of which are relatively minor in themselves were due out of an overall basis. Earnings before interest, tax, depreciation, amortization share option expense for the year was $11.5, and this resulted in a basic EPS of $0.106 versus $0.157 in 2016. Meanwhile diluted EPS of $0.257 compared to $0.29 last year. I will remind that you that I said earlier that the measures I've just given you are all before the impact of non-cash and one-off charges. I mentioned earlier, that we'll provide more information on these one-off charges. So obviously the biggest item is the $41.8 million impairment charge. This charge arises as a result of the impairment review, which we acquired to undertake annually. And so doing, the Company is required to assess the carrying value of its assets in the context of its future cash flows discounted at the cost-of-capital for the business. Companies are also required to be mindful of how these values fit with the prevailing enterprise value of market capitalization of the Company. Consequently if all the share price of the Company likely saw in 2017 can impact to the level of an impairment charge taken. Our lower market capitalization also has an impact on the cost to capital due to the impairment calculations. For example, smaller companies required to include small cap premium on calculating its cost of equity and the level of the small premium applied is dependent on the Company's market capitalization that is to say the lower the Company's market capitalization, the higher the risk premium applied or in layman's terms the smaller the Company is the higher its risk profile. This combines with the increased volatility risk talk of late has propelled our cost of capital for us from approximately 10% last year to over 14% this year. Needless to say this is how the significant impact on our calculation and was the major contributing factor when arriving at our impairment charge. It goes without saying that the impairment charge itself is entirely non-cash in nature. Just so that you're able to appreciate the impact of the impairment on the balance sheet, I'll give you the principle captions which have been impacted. Goodwill and other intangibles at $29.7 million, property plants and equipment is $10.4 million and then older assets $1.7 million. In addition to these other once-off factors, we are also recognized. Firstly, we suffered flood damage at our facility in Kansas City due to a nearby river bursting its banks following heavy rainfall in the Kansas area. The impact of this was accentuated by work being carried out in the nearby waterway by the Army Corp of Engineers, ironically enough with the view to preventing future flooding. As the flood water arose, local authority prevented our personnel from entering the facility with the result that a significant number of instruments and related parts became fully or partially submerged. Due to the electrical and electronic nature of the inventory, much of that was not salvageable. Thankfully, there was no other significant damage and to revise production scheduling, we're able to meet all subsequent customer orders. In the case of our second once-off item, we are acquired now to pay back some royalty covering a five year period in relation to a dispute over the application of the license agreement for some technology that we licensed into the third-party. As you can see from the release, we've reached the settlement with the license or thus avoided a potentially lengthening and very costly legal case. The cost here recognized also included legal fees to bring the matter to conclusion. We have done two adjustments in relation to our Swedish operations, which was closed during the year. The first relates to transferring of the foreign currency translation reserve in Sweden to normal reserve and though this was sizable, this is purely a bulk adjustment and has had no net impact on the Company’s net asset. And the second one on a more positive note, we were able to reverse some of the actual closure provisions that we made in 2016 at the time we announced the closure of our Swedish facility. At this point with significant potential legal obligations with the number of suppliers and service providers, and upon completion of our negotiations with these counter parties, we were in a position to release an excess provision, which does represent an actual cash saving and more than offset the impact of the flood and license issue that I mentioned earlier. I would now move on and talk about the significant balance sheet movements since the end of September 2017. Property, plants and equipments decreased by approximately $9.4 million. This decrease was made up of impairment charges with 10.4 depreciation in the quarter of $600,000 was offset by additions of $1.7 million with the smaller remainder being translation adjustments. Meanwhile, intangible assets decreased by $27.4 million and in this case, the impairment was back to $29.7 million, amortization $900,000 and additions were $3.2 million and again the remainder is translation adjustments. Moving onto inventories, you'll see that these have broadly remained flat from quarter three to quarter four, and coming onto our trade and other receivables have decreased by $3.9 million to $20.7 million as the reflect of improved account receivable, collections, but also lower prepayment of this time a year. Meanwhile, our trade and other payables, which include both current and non-current liabilities have gone from $23.5 million to $21.4 million to the decrease of $2.1 million. This has been largely driven by a decrease of $1.1 million regarding the loan interest accrual and the remainder being a decrease in normal trade creditors just due to the timing of payments. Finally, I will discuss our cash flows of this quarter. Cash generated from operations this quarter was $4.8 million. This was largely offset by capital expenditure of $4.7 million and then further payments then relations tacking interest they are taken into account a further $400,000 that resulted in a modest pretty cash outflow for the quarter of $300,000. The other payments would incur during the quarter included interest payments on the exchangeable note $2.3 million which represents six months interest of these payments are made annually, share buybacks of $1.3 million, one off cash payments primarily related to the closure of the Swedish facility of just under $1 million and the net result of that is the decrease in cash for the quarter from $62.5 million to $57.6 million which is a decrease of $4.9 million. I'll now hand over to Ronan who will take us through the revenues for the quarter and the year.

I am going to review our revenues for the quarter four briefly and then I'll review revenues for the year before opening the call to question-and-answer session. Our revenues for quarter four were $24.6 million compared with $23.7 million, which is an increase of 3.7%. Point-of-Care revenues were $3.8 million, which was 3% lower than the $3.9 million recorded in the prior year quarter. Clinical laboratory revenues were $20.7 million compared with $19.7 million, which is an increase of 5% over the prior quarter. The impact during the quarter of the cull of our MicroTrak and Bartels infectious disease products amounted to $750,000. Absent this factor, our clinical laboratory business demonstrated organic growth during the quarter of 9%, with our diabetes performing particularly strongly with growth of 15% when compared to the prior quarter. Now to look at the year as a whole, our revenues for 2017 were $99.1 million compared with $99.6 million in the prior year, which is a decrease of 0.5%. However, as you factor in this $3 million impact for the year of the cull of the MicroTrack and Bartels products, the organic growth rate for the year is 2.6%. Our Point-of-Care revenues for the year were $16.8 million which were down 1% from $16.9 million last year. Our U.S. HIV revenues decreased 11% year-on-year and this decrease is the same by the fact that all the cull spend in the U.S. on HIV testing continues to decrease. Meanwhile in Africa, our sales increased by 5% during the year. For more than 15 years, we had more than 90% of the African confirmatory markets and we believe that we will continue to do so, given the status of our product as gold standard. However, we have not valid to HIV screening product, which will be launch in the African market at the end of 2018. Given the quality of the product, and given the price in which we can manufacturers and given our long health reputation of manufacturer of gold standard, we believe that we can take significant market share in the screening segment of the African HIV market. We believe that this new product will transform our HIV business into a strong growth engine for the Company from 2019 onwards. Moving now on to clinical laboratory, our revenues for the year was $82.4 million compared with $82.7 million in the prior year which is a decrease of 0.4%. However the impact during the year of the cull of our MicroTrak and Bartels infectious disease products amounted to $3 million, when these factors taken into account, our clinical laboratory business demonstrated organic growth during the year of 3.3%. Our diabetes and hemoglobin variants business, which are served by the Premier and Premier Resolution instruments, respectively, performed extremely strong in quarter four with growth of 15% and demonstrated growth over the entire year of 11% when compared to the prior year. We had strong instrument placements in all of our principle markets with 311 instruments being placed during the year and 75 instruments placed during quarter four. The exception was Brazil, where we made modest placements during the year, despite strong demand for the product. This arises due to the weakness of the Brazilian real. However we have now completed the development of our new factory in Brazil, which will be in production by the end of quarter two and savings that arise on import duties and sales tax, will enable us to recommence the placement of instruments in the Brazilian market within the next two quarters. Meanwhile our Premier placements in the U.S., in Europe and in China continued strongly. It is important to remember that every instruments place as new business. We’re never replacing existing Trinity instruments as we are in the early years of the placement cycle, meanwhile our Premier Resolution instruments, which serves the hemoglobin variants market for sickle cell and anemia and thalassemia has performed strongly. This is a high-value market with few competitors and we believe with our best-in-class instrument that we can take figures of the market share here. Meanwhile, our autoimmune business performed well this year with 8% revenue growth. We have consistently grown this business since its acquisition. It means that it will be a new growth engine for the Company. The reference laboratory business has been the best performing part of the business with significant growth coming from our Sjogren's test and the growth of our business with the two U.S. mega labs. However, the great potential in our autoimmune business is in the product revenue side. We believe that we have a best-in-class immunofluorescence products range. But in order to better leverage the quality of this product range, we are currently developing new instrument. This instrument will be completed by the end of 2019. It’s an automated integrated immunofluorescence processor and reader, which will eliminate the requirement for the use of microscopes. We believe that the impact of this instrument on our autoimmune business will be transformational. Moving on to infectious disease, our revenues declined 15% during the year when compared to the prior year revenues. 12% of the 15% reduction arises due to the cull of the MicroTrak and Bartels products, with the remaining 3% of the reduction arising from the balance of the infectious disease business. Our U.S. Lyme Western Blot revenues were at level, while our Chinese infectious disease business exhibited modest growth. However, the gradual decline of our U.S. ELISA Infectious Disease business continues and the five figure diagnostic companies continue to add more and more of our product offering onto the menu of their immune assay instruments. However, we believe that we can contain the decline of this business segment to approximately 4% annually. In the past week, we have indicated that we have been targeting double-digit revenue growth but to-date we have not achieved that. As a result, when we are talking about expected growth rates, we are going to adapt to more conservative approach in the future. So for 2018, we are indicating that we are likely to see zero to low single-digit growth in revenues. However, for 2019 and beyond, this growth rate will increase as we continue to grow our diabetes and autoimmunity businesses whilst entering the HIV screening market for the first time. At the same time, our fall in Infectious Disease revenues will become less of a drag on growth as they become an increasingly smaller part of our overall business. So at this stage, could I please hand back to the operator for some questions please?

Certainly, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Jim Sidoti of Sidoti & Company. Please go ahead.

Can you give us an update on the Swedish facility with assuming the charges in the quarter, should we take that to mean that, that facility now is completely consolidated?

Yes, I mean what we -- yes that we would have released all the employees mainly in the first quarter of the year with the remainder of the last few going in the second quarter of the year. Since then, we have been negotiating then with a number of suppliers, whereby we’ve certain contracts minima, et cetera, for example to do with instrumentation and also land -- the landlords in relation to the property that we had taken and then some other commercial obligations which we had. And in the last few weeks of the year, we resolved all those issues and made our final payments on those, as you can see on the release we were able to release an access provision. So obviously the arrangements that we have made at those suppliers and service providers was lower than the absolute legal maximum that could be in the case. And that basically draw the line on to that, we have essentially no further obligations in Sweden we’ve no facility there, we’ve no employee and I don’t expect that to me further cash.

So now that facility is consolidated, should we see any impact in 2018 on the SG&A line?

No, I wouldn’t expect to see any impact I mean that's people who are in the facility, they have been let go earlier in the year and we would have accrued their cost at the end of 2016 and the year for the remaining period as we're just talking people who are being paid in redundancy and then tidying up with plant and just extracting ourselves from that situations. So, there isn't really a saving if that's what you're looking for an '18 versus 17.

Okay. And then the pickup in revenue in 2019, I think you said was the diabetes instrument and also the new HIV test. What should we think about in terms of gross margins for those products and the impact on 2019 gross storage?

Yes, I think first of all, what I would say is, when thinking about gross margin obviously the higher the revenue, that tends to propel our gross margins upward -- because what we'll in fact be doing, it’s spreading our fix cost over a wider revenue base. So, just volume of itself tends to improve our gross margin. I think also when we start getting to the HIV screening side of the business, that will have an above average impact on our gross margin by virtue of the fact that we’ve got a very good cost of manufacture in relation to that products, and the pricing was not as good as the confirmatory testing market is still reasonable at this juncture. So, I would expect slight increase at year-on-year so between even between '17 and '18 potentially and then even '18 and '19.

[Operator Instructions] And your question will be from Paul Nouri of Noble Equity Fund. Please go ahead.

Just wondering, if foreign exchange helped results at all in the fourth quarter and what impact it supposed to have in 2018?

And that is virtually zero, there was a few things around about in relation to the FX, there is the impact on foreign currency -- of the previous foreign currency movements and distributor pricing. And that has some impact on gross margin, but the actual movements in rates on foreign currency denominated revenues and costs as it was virtually neutral. So, there was not a headwind nor a tailwind on that. Going forward, I think if your rates would stay as they are, we might get a small tailwind in relation to the -- our revenue line is -- probably wouldn’t have a huge impact on our profit line because in essence we've got a natural hedge within our income statement. So, if rates stay where they maybe a slight tailwinds, but other than that nothing.

Okay. And then excluding one-time shortages, what was the amortization expense in 2017 versus 2016?

The amortization expense in 2017 was $3.3 million and it was $2.8 million in '16.

Okay. Because once the Cardiac program was abandoned out under the impression that costs were going to fall at least somewhat in 2017, but they seem to have continued increasing. So maybe you can reconcile that for me?

We have that obviously the vast majority of the cost in relation to Meritas had been capitalized as development cost. There was some costs which were going through the income statement and what we have said at the time was, that a lot of those costs would remain in the P&L because we would have people evaluating what their options were for that particular platform. We also decided that we will redeploy some of the individuals throughout the Company. And then, there were other costs which are mainly third-party costs which did get eliminated, would have been offset by the other inflationary costs within the SG&A line.

Okay. And then, how should we think about profitability then going into 2018 while operating expenses rise with revenue? Or what are some of the dynamics?

The majority of our operating expenses are fixed in nature. So we don't think there is going to be a huge increase, if revenues do increase. So obviously the key thing is in terms of what the revenue is going to be? Ronan would have outlined that to think about things in terms of zero to low-single digit growth. If you are to take that the lower end of that, which will be the zero end of that. I still think we'll get some improvement in gross margin for no other reason that mix didn't quite help with this year and we would have maybe modest increases in our SG&A costs. And we'd hopefully get a modest enough increase on operating profits. And if we go up to the sort of low-single digit level say for example $99 million or $102 million, you would be maybe seeing an operating profit moving somewhere like $5.4 million $5.5 million at the moment around $7 million $7.5 million maybe a little bit higher. It's quite a leverage effect as you get top line growth notwithstanding the fact that it isn't at such a modest level. So to say, we can go from that $5.5 million of operating profit with 99 to maybe 7.5, 7.7 in with $102 million.

Okay. And then I think if I read it correctly, capital expenditures were $4.5 million for the quarter which seems a little high. But what was the factor behind that?

I was similar enough I mean if you look at last year's number in quarter four which would have nothing from Meritas, it was broadly in line with just a little bit higher. We did have some expenditure in relation to our Brazilian plant, which we incurred during the quarter. And other than that it would have been broadly in line with what we would have seen before.

[Operator Instructions] And I'm showing no additional questions. Mr. O'Caoimh, I'll hand it back to you for your closing remarks.

Thank you very much. We'll close the call now and look forward to talking to you at our next conference call. So thank you very much and good afternoon.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. At this time, you may disconnect your lines.