Trinity Biotech plc (TRIB) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Trinity Biotech Third Quarter Fiscal Year 2019 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead.

Thank you, Nicole, and thanks all of you for joining us to review the financial results of Trinity Biotech for the third quarter of fiscal year 2019, which ended September 30, 2019. 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 those prepared statements, 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 a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectations 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 regulation 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 filings 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?

Thanks very much, Joe. Today, I'll take you through the financial results for quarter 3 2019. Beginning with our revenues. Our total revenues for the quarter were $24.6 million, which compares to $23.7 million in quarter 3 of 2018. As Ronan will provide more details on revenues later in the call, I will now discuss the rest of the income statement. Our gross margin this quarter was 41%, which compares to 42.1% for the same quarter last year. There were 2 principal factors, which led to this reduction. Firstly, we had significant placements of instruments this quarter and as most of you are aware, such sales tend to have a significantly lower gross margin due to the razor-razorblade model that we adopt from sales point of view. Meanwhile, we have again been adversely impacted by currency movements since the dollar continues to increase. This calls the squeeze in margins when we invoice in other currencies such as the euro, sterling, Canadian dollar and, in particular, the Brazilian real, which fell sharply this quarter. Moving on to our indirect costs. Our R&D expenses during the quarter fell from $1.3 million to $1.2 million. However, our SG&A expenses increased in the quarter from $7.1 million to just under $7.3 million, driven by a combination of higher sales and marketing costs and also professional fees that we incurred during the course of resolving our recent tax audit. Meanwhile, our share option expense for the quarter dropped from $367,000 to $252,000. So overall, our total indirect costs were flat at $8.8 million for the quarter. The net result of this is our operating profit from the quarter was $1.3 million, which represents an increase of $100,000 compared to quarter 3 2018. And in summary, this is due to the increase in revenues being largely not fully offset by the reduction in gross margin as there was no change in indirect costs quarter-on-quarter. Moving on to our financing costs. Our financial income for the quarter was just over $100,000, which is lower than in the comparative period due to a lower level of cash deposits. Meanwhile, our financial expenses increased from $1.1 million to $1.2 million. However, this is not a like-for-like comparison as it contains just over $200,000, which relates to the interest elements imputed into lease transactions arising out of the new lease standard, IFRS 16, which was introduced for the first time this year without a requirement to restate the prior year comparatives. Then further down the income statement, you all have seen a noncash expense of $72,000, which represents the noncash financial expense relating to our notes, net of the slight gain arising due to a reduction in the fair value of the derivatives embedded in the notes. Our tax charge for the quarter was $114,000. This represents an effective rate of 9%, which is in line with normal levels. On an overall basis, the profit after tax for the quarter was $25,000 compared with $900,000 in quarter 3 last year. However, excluding noncash items, which is a better comparison, the profit for this quarter was $97,000 versus $274,000 in quarter 3 last year. And this equates to an EPS of $0.005 versus $0.013 last year. Meanwhile, fully diluted EPS was $0.043, down from $0.051. And the reduction in EPS is, in large part, due to the introduction of IFRS 16, which had an impact of approximately $0.005 in the quarter. Finally, on the income statement, earnings before interest, tax, depreciation, amortization and share option expense for the quarter amounted to $3.1 million, and the constituent parts of this are disclosed in today's release. I'll now move on and talk about the significant balance sheet movement since the end of June. Property, plants and equipment remain constant at $26.3 million. This is due to additions of $900,000 being offset by depreciation of $800,000 and the FX movements of $100,000. In the same period, our intangible assets increased by $1.9 million. And this was made up of additions of $2.6 million offset by amortization charges of $700,000. Moving on to inventories. You'll see these have decreased by approximately $1.5 million to $30 million. This follows a similar pattern to other years when inventory levels have tended to fall in quarter 3 due to seasonal factors, principally surrounding the Lyme season. But this year, it was also influenced by the strong level of instrument sales during the quarter resulting in lower levels of the corresponding inventory. Meanwhile, trade and other receivables have increased slightly from 24.8 million -- to $24.8 million from $24.3 million in June. This is obviously due to the increase in sequential revenues. Though the fact that the increase wasn't higher was due to the strong collections during the quarter. Trade and other payables, including both current and noncurrent, also increased from a combined $36.8 million to $37.9 million with the main reason being the increased accrual of 1 quarter's interest on our exchangeable notes. Moving on next to our cash flows for the quarter. Cash generated from operations for the quarter was just over $3.2 million. This was augmented by improvements in working capital of $1.6 million, thus largely reversing the adverse impact of working capital movements during the first half of this year. Capital expenditure in the quarter was $3.8 million versus $4.3 million last year, thus continuing the trend of lower capital expenditure this quarter as had previously been flagged. Then the other principal cash flow movement in the quarter was the repayment of $800,000 in relation to the capital element's leases, which under IFRS 16 are treated as a financing item. This has resulted in cash balance at the end of September of $25.1 million, hence an increase of $100,000 in cash for the quarter. I'll now hand over to Ronan. Ronan O?Caoimh: Thank you, Kevin. I'm going to review our revenues for quarter 3 before opening the call to a question-and-answer session. Our revenues for quarter 3 were $24.6 million compared with $23.7 million in the corresponding quarter last year, which is an increase of 4%. Point-of-Care revenues were $3.9 million compared with $3 million in the corresponding quarter last year, which is an increase of 29%. Clinical Laboratory revenues were $20.7 million, which is identical with the corresponding quarter last year. Moving back to Point-of-Care, our revenue has increased this quarter by 29% when compared with the corresponding quarter. Our African HIV revenues were strong compared with the corresponding quarter and this is explained by the haphazard nature of ordering patterns, which characterize this market. Given that we have neither gained nor lost any contract over the past 12 months and there have been no changes that have affected us relating to national algorithms, we expect that our 2019 African HIV revenues will be broadly in line with 2018. Meanwhile, as previously indicated, we have developed a HIV-screening product called TrinScreen, which we anticipate will be launched on the African market next year. Given the quality of the product and given the price at which we can now manufacture the product in our automated plant in Ireland and given our long reputation as a manufacturer of gold standard, we believe that we can take significant market share in the screening segment of the African HIV market, which comprises 170 million tests annually, and it's many times greater than the confirmatory market in which we now operate. Our new HIV TrinScreen product is currently undergoing independent trials in Africa to support a WHO submission, and it is anticipated that the product will be submitted to the WHO in January next year. Given that we now have a high-volume, low-cost manufacturing facility in Dublin, we believe that this new product will transform our HIV business into a strong growth engine in the future. Moving now on to Clinical Laboratory business. Our revenues for the quarter were $20.7 million, level with the corresponding quarter last year. During the quarter, we suffered a currency headwind, which amounted to $250,000, and the biggest component of this is explained by the weakness of the Brazilian real. Our Infectious Disease business decreased 11% year-on-year in terms of the corresponding quarter. Our U.S. business declined due to Lyme Western Blot business migrating to Lyme immunoassay and also due to continuing migration from enzyme immunoassay to random access platforms. However, on a positive note, our non-U.S. Infectious Disease business comprising China, Europe and the rest of the world has performed well year-to-date with revenues flat compared with prior year. Moving on to our diabetes and hemoglobin variant business. This had a strong quarter with revenue growth of 6% when compared with the corresponding quarter last year. Instrument placements were an incredibly strong 108, and we believe that we will comfortably place more than 300 instruments during 2019. It's important to bear in mind that every instrument we place is new business and that we are never replacing existing Trinity instrument as we are in the middle years of replacement cycle. Meanwhile, our Premier Resolution instrument, which serves the hemoglobin variant market for sickle cell anemia and thalassemia among other conditions, performed well in Europe, while we expect to receive FDA approval for our Premier Resolution from the FDA in the first half of next year. Receipt of FDA approval will enable us to enter the U.S. market, but will also enable the commencement of the Chinese regulatory process. These are high-value markets with few competitors, and we believe that with our best-in-class instrument and reagent that we can take significant market share. Meanwhile, the launch of our new hemoglobin Point-of-Care instrument, the Tri-Stat, adds a significant new business opportunity in our hemoglobin's business. We expect to place approximately 400 instruments around the world during 2019 and expect that this level of placement will be significantly exceeded upon receipt of Chinese approval, which is expected by the middle of next year. We anticipate significant success with this product, which we believe will grow -- will quickly grow to constitute a significant percentage of our hemoglobin revenue base. Moving on to Fitzgerald, our monoclonal antibodies business, grew revenues 4% compared with corresponding quarter and this business, as ever, continues to generate very strong EBITDA. Meanwhile, our autoimmune business grew 5% this quarter when compared with the corresponding quarter last year. Specialist reference laboratory business performed well with significant growth coming from our Sjogren's test range and from the growth of our business with the 2 mega labs. On the product revenue side of our autoimmune business, our strategy is to grow our best-in-class immunofluorescence product revenues while also growing our immune -- enzyme immunoassay product revenues around the world, particularly in emerging markets, while -- meanwhile, developing our new automated, integrated immunofluorescence processor and reader, which will largely eliminate the requirement for the use of microscopes with our immunofluorescence product range. This strategy is working successfully for us, and we've had significant success in China with our immunofluorescence range. And if I could now hand back to -- for a question-and-answer session, please.

[Operator Instructions] Our first question comes from Jim Sidoti of Sidoti & Company.

Ronan, can you hear me? Ronan O?Caoimh: Jim.

Great, great. First question, the timing of the release, typically you guys report later in the month and you give a week or 2's notice ahead of time. Can you just explain why you put out the release last night that you're going to report today? Ronan O?Caoimh: Yes. No, just after we've traveled and logistics lines both have assisted later on this quarter. We are conscious that we went late last quarter and we just felt that it was appropriate to get out earlier rather than wait for couple of weeks with the -- we're in danger of having to go into November. We didn't particularly want to set that trend 2 quarters in a row. Jim, I think we're also conscious of the -- of where the stock price was and we felt that the results were reasonably strong, we felt we get them out quickly.

Yes, yes. That makes sense. Can you -- any comment on the sales of instruments in Brazil and also the sales of the new instrument here in the U.S. for A1c? I mean are they running about where you thought they would be, a little bit better, a little bit worse? Ronan O?Caoimh: Okay. Well, I mean we're up and running in our factory in Brazil. So despite the weakness in the real versus dollar, it's like at BRL 4.15 now, it's a nightmare rate and we have commenced placing again and so there was modest number of placements in Brazil this quarter. I think it's 4 or 5 instruments. In terms of the new A1c instrument, remember, the resolution is not actually approved -- sorry, the resolution variant instrument is not yet approved in the USA. So we don't have sales there yet. So we're talking about resubmitting in the next -- probably 90 to 120 days and then hoping for an approval before midyear of next year for the resolution.

Right. No, I was talking about the smaller instrument that you've, I think, started to note. Ronan O?Caoimh: Oh, Tri-Stat. Yes, well, Tri-Stat, we saw very modest numbers in the USA. It's -- really our concentration is on non-USA, non-Europe for that instrument. I mean it's a clear waive market in the USA and we haven't actually even submitted for a clear waiver with the instrument. We might get -- well, get it, but we haven't actually made that submission. So our concentration is very much on the non-U.S., non-European markets.

All right. So then aside from the shift in currency rates, would you say that the sales in Brazil are about where you thought they would be? Ronan O?Caoimh: Yes. I mean Brazil is performing well. We have 68% of the hemoglobin A1c market, for example. So I mean we performed extremely well. Everything has been perfect in terms of what we've done, how we've executed with the single exception of the fact that the dollar has moved from BRL 1.80 when we commenced there to BRL 4.15 at this moment in time, which obviously is a very big headwind.

And then TrinScreen, that sounds like that submission is delayed about a month. Is that the timing for your trial or what caused that delay? Ronan O?Caoimh: It's taking -- the trial is just taking a little bit longer, taking longer to close out the trial in terms of HIV-2 samples, subtype O samples, sensitivity analysis, et cetera. Just the thing is just dragging in the individual sites in South Africa, Kenya, Ivory Coast. But we think we expect that we will get it wrapped up -- we'll get all the data pulled together and wrapped up by the end of January, reasonably confident enough to get there. I know there's been a slippage, but I think we'll meet that time line.

All right. And then, there's been some chatter about your cash flow, your debt position. Can you just remind me -- I know when you bought back some of that note last year, you indicated you thought you'd be cash flow neutral in 2019, 2020. Do you still think that that's the case? Ronan O?Caoimh: I think I said actually, Jim, in the last call that we'd hoped to now revising that. Obviously, our -- the first half of the year revenue-wise wasn't as strong as we had hoped. We had hoped for a second -- a stronger second half. Obviously, quarter 3 has been stronger in that regards sequentially and we'll be hoping for another strong quarter in the quarter 4. I think a few things -- little givings will have to go in our favor to get to cash flow breakeven for H2, but we're still shooting for that. We do have to pay 6 months of interest in the -- in quarter 4. So there's a $2 million headwind there. And we'll have to overcome that by enhanced profitability and hopefully, again, favorable working capital movements. It tends to be a trend of ours that we do suffer a negative working capital in the first half of the year and it tends to go the other way in the second half of the year. So we're still hoping for lash by the end of the year. But I'll say, a couple of things are going to have to go in our favor. Obviously, that a discussion there excludes the impact of the tax payment, which we haven't paid that we announced last quarter.

Right. How about 2020? Do you think you'll be cash flow neutral in 2020?

Yes. I think we're expecting to get that revenue growth in 2020 and as we've discussed before, by getting enhanced revenue growth there's kind of -- there's a lot of leverage in our income statement and that should produce the additional cash and what enables to be cash flow breakeven. We anticipate that our CapEx, like has been the case this year, will continue to reduce next year. So you move from a situation whereby CapEx is -- we have a situation where our CapEx is going down and operating cash flows are going up and that moves us into the cash flow breakeven zone.

Okay. And then I just want to be clear, the -- on the notes, you're not required to repurchase any of those notes until at least 2022. Is that correct?

Well, 2022, that's correct.

[Operator Instructions] Our next question comes from Jonathan Sacks of Stonehill Capital.

Congratulations on a nice quarter and also thank you for providing some additional disclosure on the EBITDA calculation. That's helpful for us. Just a small question. Can you just talk a little bit about your capital expenditure? And what would you characterize as maintenance CapEx or general ongoing CapEx for your existing book of business versus CapEx that is oriented towards growth or new products? And any other color you could provide along those lines would be helpful.

Yes. So if you look at our cash flows -- of our CapEx, if you're -- the intangible CapEx, which as you see this quarter, was additions of about $2.6 million. That is pretty much all directed towards new product. Under IFRS, you can only really capitalize that either for a process enhancement or for the development of a new product. We don't really do much of the former -- this note is really all new products. You can treat all of that $2.6 million run rate as being for new products. In relation to our PP&E, products, plants and equipment as such, that is made up of what I will -- 2 buckets really. We've got instrumentation, which are capital leases. So proportion of that would be made up of instruments in basically Brazil and in the USA, the direct markets in which we operate. So it's little bit $300,000 or $400,000 per quarter in relation to that. And the rest of the CapEx on PP&E is -- essentially includes what you're calling their maintenance capital as such. So you're talking about $400,000 or $500,000. Some of that does include some equipment that we are buying in advance of TrinScreen getting ready for production. So to be honest, if we were not developing new products and we were not introducing new production lines for new products, our capital expenditure would end up being very, very low in the order of $1 million to $2 million a year.

Okay. On a -- sort of on an annual normalized basis and I know it'll be rough because some of the distinctions may not be so black and white, but on an annual run rate basis, what would you say total maintenance CapEx is?

Well, of the PP&E, that's probably $1 million to $2 million, which -- and probably closer to the lower end of that range. The intangible expenditure you might end up having maybe $1 million to $2 million there, if you're talking about keeping new instruments refreshed and putting new versions of those instruments out, but the vast majority of that expenditure is on brand-new products. So you're talking about the very low level of maintenance CapEx. So $1 million to $2 million maybe on each of the 2 headings, so $2 million to $4 million, maybe so I would think about as $3 million.

Our next question comes from Matt Reiner of Adirondack Funds.

On the Premier instrument placements, can you -- you said there was 108 in the quarter, I believe. And you are thinking 300 for the year. Can you refresh our memory, what was already placed in the first half of the year? Ronan O?Caoimh: I think it's about 124, I think for the first half.

Yes. I think it was 60-something in each of the first 2 quarters. So yes, we will very comfortably exceed 300.

Okay. All right. So it would imply another 70-or-so in the fourth quarter, roughly? Ronan O?Caoimh: Which we should beat. But -- I mean 108, I think, is a very, very strong quarter I assume.

Yes.

How many of those -- how many Premier out in the market in total now? Ronan O?Caoimh: We're over 2,000 now, 2,100 maybe.

And do any of the -- like what's the lifetime on those? Like do any need to be replaced? Or that -- these are all new placements, correct? Ronan O?Caoimh: Typically, when we sign reagent rentals agreement, we sign for 5 or 6 years. The reality though is that these instruments run for 8 years, and probably about 8. So we did our very first placement in 2012 with a small number. So we're -- I'd say, we're still in the -- we're getting towards the end of -- for some of the instruments, towards the end of their life cycle. But we've replaced very few over the years. So that will just start happening now, I think, in 2020.

Okay. And what's the lag between the placement to when you start getting the renewables or the razor blade, I guess, so to speak, revenue? Ronan O?Caoimh: Well, I mean it depends. I mean it -- in USA or Brazil, if I were distributing direct, it might be a matter of 2 months or something like that, but in China where we ship to our distributor who, in most instances, use sub-distributors, that's probably more like 6 months.

Yes. Okay. Ronan O?Caoimh: Typically, like that...

And is there an average that a machine typically does once it gets old? Ronan O?Caoimh: Yes. What we've said -- we indicate that the typical instrument does between $10,000 and $11,000 worth of reagent annually or of razor blade. And -- but that's the kind of an apples-and-oranges estimation because based on what you have is, you'd have -- you are offsetting direct in Brazil, for example, commanding a higher price at a very -- much higher price than we sell direct to the USA and then, for example, in China, much lower price where we have our distributor selling to a sub-distributor and then for example, in Europe, Menarini, who buy directly from us and place the instruments across Europe. So it's -- we're adding apples and oranges, but on average, we're talking about $10,000 to $11,000 of reagent per annum, which would constitute 25,000 -- in average, 20,000 tests per year, something like that. And it may be lower -- maybe we saw a bit lower. But maybe lower than 20,000 average, 15,000, 16,000 average tests.

Okay. And then, if we look the other instrument, the -- was it the Tri-Stat instrument? Does that have a similar type model where there is reagents with that as well? Ronan O?Caoimh: Yes. But I mean that is more like at doctor's office instrument. So it runs much, much smaller volumes. Typically, it might run maybe be 2,000 or 3,000 tests a year. So it might run 10 tests a day, something like that, all right, on average. Even sometimes, less than us. And so for example, in the USA, the equivalent instrument would be very much at doctor's office, instruments for us. It's a kind of instrument that might be used, say, for example, in Indonesia on islands as a backup, maybe instrument in much smaller diabetes clinics and these, in some instances, in kind of multiple doctor practices, but -- as well as typically on -- in very small diabetes clinics.

Okay. And then, lastly, have you looked at repurchasing any more of the debt? I mean I know you bought some last year. Is that something that's still on your radar? Ronan O?Caoimh: It's not really. I think -- I mean we took the opportunity to buy back $15 million worth of the bonds at a price of -- for $12 million, basically just -- bought just under $0.80, but I don't think it would make -- I think it'll be foolish for us to do that now given our cash balance. I think we need not just to have a reasonable amount of cash on hand but also to be seen to have a reasonable amount of cash on hand. So despite the fact that we're confident that we don't need all the money that we have on hand at the moment, we think it wouldn't be expedient to be seen to spend it. And I think, we'd have to see strengthening cash balances before we go back into the market. Having said all of that, we are extremely conscious of the fact that the bond matures in 2.5 years' time.

Our next question comes from [ Ron Legrow ] of the Athena Fund.

So this question is for Kevin. We really need to get out and market the company to new investors. Do you intend to do that?

Sorry. Could you repeat that question? I didn't hear you fully, sorry.

We really need to get out and market the company to new investors. Do you intend to do that?

Yes. No. We do that on a continuous basis. We have our own investor relations firms. We attend conferences. We do a lot, both myself and Ronan do a lot of calls to potentially new investors. It's the large part of what we do. But we would concede that maybe we should do more.

Is there any events coming up that you're going to be attending?

We're not booked into anything right now. And I think we'll probably have [indiscernible] Conference in New York in March. That's the only thing I think we are booked into right now. Ronan O?Caoimh: A lot of what we do is -- now sort of just our own roadshows, using our own Investor Relations room.

Our next question comes from Craig Gilbert of Linden Advisors.

Just can you repeat what happened with the Lyme business? I thought we were kind of cycling through the contract loss, but it looks like there's some other stuff at play there. Ronan O?Caoimh: The small amount of residual, I'd say, just in terms that there was a partial quarter that's out there, the contract that we lost, that was having some revenues in quarter 2. I think we'd said before that our first full quarter where we're going to be out of that will be quarter 4. There is a certain amount of residual this quarter. Also I think we are sensing as well this quarter -- this Lyme season is a little bit weaker than last year. So those 2 factors at play there.

Okay, okay. And you mentioned that the Fitzgerald business had strong EBITDA. Can you put some numbers around that? Ronan O?Caoimh: Yes. It's very close to $4 million per year.

Okay. $4 million of EBITDA?

Yes.

Okay. And then on the TrinScreen, the submission to the WHO in January, what does that imply in terms of when do you think we'll start to see revenues? Is that more of a 2021 event? Or do you think we could start to see that in 2020?

I think it's realistic in more 2021 because -- and if we submit in January, you can probably have July, that's 6 months for WHO before we get an approval. I mean you might get it sooner than that, but I think it's reasonable to assume 12 months. And after that, then we have to actually win -- we have to actually get selected on an algorithm in an individual country and they're rotating all the time. All these countries are up for renewable, but by the time you would actually get on to an algorithm and get an order realistically, we're looking probably at 2021. We might get something in 2020, but it's not going to be material.

Our next question comes from John Peters of Highbridge.

I just want to follow up on your previous sort of statements regarding the convertible maturity. I mean as you know, the convertible bond is now trading in the 70s and the equity continues to, I guess, unfortunately trade pretty poorly. Given the apparent debt overhang here, I think all investors would like to get a bit more clarity around how you plan to satisfy the CV in 2022?

I mean just to say, John, I know you're a very big holder off the desk, but -- I mean what can I say other than that we're extremely conscious of this. We know it's something we need to deal with. It's foremost on our minds, but I don't think really this is the forum in which I should outline to you how we might repay your debt, bit of respect. But just to say that we're extremely conscious of this. And I'd say, it's very much on our minds. We bought some back in the market, we could do that again. I explained in response to an earlier question there that in the circumstances where we were more confident of our cash flows there had proven that our cash flows, we might go into the market, but we very much realize that 2.5 years is a very important moment and we may do a transaction before then, we may do many various things. I'd say, we -- I don't think this is really the forum to outline how we would deal with this. Ronan O?Caoimh: Okay. And I think -- I don't -- we don't have any more questions. So could I thank you very much for your support, and wish you a very good afternoon. So thank you so much. Talk soon.

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