U.S. Markets open in 2 hrs 6 mins

Edited Transcript of TRIB earnings conference call or presentation 20-Aug-19 3:00pm GMT

Q2 2019 Trinity Biotech PLC Earnings Call

Bray, Co Wicklow Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Trinity Biotech PLC earnings conference call or presentation Tuesday, August 20, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kevin Tansley

Trinity Biotech plc - CFO, Company Secretary & Executive Director

* Ronan O’Caoimh

Trinity Biotech plc - Co-Founder, Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Jonathan Scott Sacks

Stonehill Capital Management LLC - Managing Member

* Joe Diaz

Lytham Partners, LLC - Managing Partner

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Trinity Biotech Second Quarter Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Joe Diaz. Please go ahead.

--------------------------------------------------------------------------------

Joe Diaz, Lytham Partners, LLC - Managing Partner [2]

--------------------------------------------------------------------------------

Thank you, Sean. And thank all of you for joining us to review the financial results of Trinity Biotech for the second quarter of calendar year 2019, which ended June 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'll open the call for a question-and-answer session. But before we begin with those 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 a 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 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 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'll open the call for your questions. Kevin?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [3]

--------------------------------------------------------------------------------

Thanks very much, Joe. Today, I'll take you through the results for quarter 2, 2019. Beginning with our revenues, total revenues for the quarter were $22.5 million, which represents a decrease of approximately $2.5 million versus quarter 2, last year. Ronan will provide more detail on these revenues later in the call.

In the meantime, I will move on and discuss the other aspects of the income statements. Our gross margin for the quarter was 42%, which is broadly consistent with the first quarter of this year. However, when compared to the quarter 2 2018, it is 1.2% lower. As you'll have heard me mention before that due to the highly fixed nature of our cost base, our margins are very sensitive to revenue fluctuations. I should also say that we were impacted by the fact that the principal decrease in revenues this quarter rose largely in the HIV sector, which was one of our more profitable product lines. In addition, currency movements in the quarter, particularly with regards to the Brazilian real, were also a drag on margins.

Moving next to our indirect costs. In total, they've fallen by over $800,000 in the quarter to $8.3 million. Within this, you were seeing relatively flat R&D expenses at $1.4 million while SG&A expenses decreased by over $700,000 to $6.6 million due to our continued emphasis on cost control. Meanwhile, our share option expense also decreased from $300,000 to $200,000.

The net result of all this has been a decrease in operating profit from $1.7 million to $1.2 million, hence a decrease of $500,000. And just to break that down, the lower revenues and gross margin caused our gross profit to fall by $1.4 million. Although, we made back over $800,000 of this than through lower indirect costs.

Moving onto our financing costs, which includes the impact of our exchangeable notes. Our financial income for the quarter was $133,000 versus $196,000 at the comparative period. This is primarily due to lower levels of cash and deposits.

Financial expenses were $1.2 million for the quarter, of this $1 million relates to cash interest element of the exchangeable notes, for which the equivalent figure in quarter 2 2018 was $1.15 million. The reduction being due to the notes repurchase we made last year. The remaining $200,000 relates to the additional financing charge element of lease payments as a result of the new accounting standard for leases, IFRS 16, which I discussed at length on the last call.

Then there is a noncash financial income of $150,000, which is disclosed further down the income statement, and that also relates to our exchangeable notes with noncash interest of approximately $160,000 being offset by a gain of over $300,000 recorded for the change in the fair value of the derivatives embedded in the notes.

Moving onto our tax charge, which you will see from the release amounts to $5.7 million. Of this, $147,000 is the normal tax charge for the quarter and represents an effective tax rate of 12% of operating profit. In addition, there's also once-off tax charge of approximately $5.5 million in respect of a tax audit carried out in one of the company's subsidiaries. This charge relates to a payment due in respect of historic payroll taxes over a multiyear period and has been agreed with the relevant tax authority.

The net results is a loss for the quarter, $5.4 million. However, excluding noncash items and the once-off tax charge that I just mentioned, the company was approximately breakeven for the quarter. This on an equation that on a diluted EPS basis of $3.7 million -- $0.37. Finally, on the income statement, earnings before income taxes, depreciation, amortization and share option expense for the quarter was $2.9 million.

I will now move on and talk about the significant balance sheet movements since the end of March 2019.

There was a reduction in property, plant and equipment of $300,000. Additions in the quarter were $500,000, and then this was more than offset by depreciation charges of $800,000. In the same period, our intangible assets increased by $1.7 million. And in this case, it was made up of additions of $2.4 million, partially offset by amortization of $700,000.

Moving onto our inventories. You will see these have increased by 1.8% or $500,000 and now stand at $31.5 million. The small percentage increase is mainly due to timing factors, primarily, higher instrument-rated inventory in order to fulfill expected strong demand in the second half of the year. Meanwhile, trade and other receivables have increased almost $800,000 to $24.3 million, which is broadly in line with higher sequential revenues.

Our trade and other payables, which includes both current and noncurrent payables, have decreased by $1.8 million to $36.8 million. $1 million of this decrease relates to the interest on exchangeable notes as we made a biannual interest payments of $2 million during the quarter and then accrued an additional quarter of interest of $1 million. The remaining reduction of trade and other payables mainly relates to lower-lease liabilities due to payments made during the quarter.

Finally, I'll discuss our cash flows for the quarter. Cash generated from operations for the quarter was $1.5 million compared to $1.7 million during the equivalent quarter last year, while capital expenditure in the quarter was $3.1 million, which is $800,000 lower than the corresponding quarter last year.

Next, we have the lease payments of $800,000, which arise on leases, which have been capitalized in 2019 due to the adoption of IFRS 16. And then there was an exchangeable note interest payment of $2 million, which is $300,000 lower than the corresponding quarter last year due to the partial note buyback.

The net results is that we had a decrease in cash for the quarter of approximately $4.4 million, bringing the quarter-end balance to $25 million.

I'll now hand over to Ronan.

--------------------------------------------------------------------------------

Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman & CEO [4]

--------------------------------------------------------------------------------

Thank you. I'm going to review our revenues for quarter 2 before opening the call to a question-and-answer session.

Our revenues for quarter 2 were $22.5 million compared to $25 million in the corresponding quarter last year, which is a decrease of 10%. Point-of-Care revenues were $2.1 million compared with $4 million in the corresponding quarter last year, which is a decrease of 47%. Clinical Laboratory revenues were $20.4 million compared with $21 million in the corresponding quarter last year, which is a decrease of 3%.

Moving back to Point-of-Care, our revenues decreased this quarter by 47% when compared with the corresponding quarter. Our African HIV revenues decreased 51% when compared with the corresponding quarter, and this is explained both by the haphazard nature of ordering patterns, which characterize this market and also by the fact that a number of quarter 2 orders were collected by a number of customer carriers in the early days of quarter 3.

Given that we've neither gained nor lost any contract over the past 12 months and there had been no changes that has affected us relating to national algorithms, we expect that our 2019 African HIV revenues will be broadly in line with 2018. Meanwhile, our U.S. HIV revenues decreased by 12%, and this is explained by the fact that public health spending in the U.S. on HIV testing continues to decrease.

Meanwhile, as previously indicated, we have developed a HIV-screening product called TrinScreen, which we anticipate will be launched on the African market in the first half of next year. Given the quality of the product and given the price at which we can now manufacture the product in our new automated plant in Ireland and given our long reputation as 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 is many times greater than the confirmatory market in which we now operate.

Our new 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 by year-end. 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 on to our Clinical Laboratory business. Our revenues for the quarter were $20.4 million, which is a decrease of 3% over the corresponding quarter last year. During the quarter, we suffered a currency headwind, which amounted to $400,000, and the biggest component of this is explained by the weakening of the Brazilian real, which moved from 3.25 last year to our current rate of 4.

Our infectious disease business decreased 15% year-on-year. Our mainline infectious disease business decreased 5% when compared with the prior quarter. And as we have signaled in the past, this is in line with our expectation, given the ongoing migration by laboratories from ELISA onto random-access platforms in the United States. However, additionally, as previously announced, during the year, we also suffered the loss of a significant Lyme confirmatory contract with one of the major clinical laboratory services in the USA. And this loss, which approximated $2.1 million annually, gave rise to a 9% decrease in our infectious disease revenues in this quarter when compared to the corresponding quarter last year.

On an ongoing basis, we expect shrinkage of our infectious disease business to be approximately 5% annually, given that the other segments of the business have performed well, particularly in China.

Meanwhile, our Diabetes and hemoglobin variant business had a very strong quarter with revenue growth of 16% when compared to the corresponding quarter last year. Instrument placements were 62, and we believe that we will comfortably place more than 300 instruments going 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 the placement cycle.

Meanwhile, our premier resolution instrument, which serves the hemoglobin variant market for sickle cell anemia and thalassemia, 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 between 400 and 500 instruments around the world during 2019 and expect that this level of placement will be significantly exceeded upon receipt of Chinese approval, which is affected 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 hemoglobins' revenue base.

Meanwhile, our autoimmune business grew 7% this quarter when compared to the corresponding quarter last year. The 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 U.S. 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 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 IFA product range. This strategy is working successfully for us, and we've had significant success in China with our IFA product range.

At this point, if I could hand back for a question-and-answer session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question today will come from Jim Sidoti with Sidoti & Company.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [2]

--------------------------------------------------------------------------------

Can you hear me?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [3]

--------------------------------------------------------------------------------

Hi Jim, how are you?

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [4]

--------------------------------------------------------------------------------

Good. Good. Just can we bring overtiming on a couple of the new products, TrinScreen. I think I heard you say you expect to submit that to the WHO by year-end. So is that something you expect to have approval for in the first half of 2020?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [5]

--------------------------------------------------------------------------------

It's difficult to be certain about that, but we would hope that we could turn it in -- within 6 months, yes. And just to say that there have been delays in terms of the trial, which you know, the trial sites are South Africa, Kenya, Ivory Coast. There's been some delays in terms of finalizing validation batches, et cetera. But we're confident of the time lines we've just outlined.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. So submitting by 2020 and then it's, kind of, up in the air when you get the approval?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [7]

--------------------------------------------------------------------------------

Yes. Submitting by year-end and then -- yes. Hopefully, we get it through 4, 5, 6 months, but as you know we're not in control of that.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [8]

--------------------------------------------------------------------------------

Okay. How about -- you talked on past calls about manufacturing premier in Brazil. What's the timeline for that?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [9]

--------------------------------------------------------------------------------

Okay. Well that's actually -- I'm glad to say that, that's up and running. We're now manufacturing in Brazil. We have had all the approvals and it's happening, it's live. And actually, just while I'm saying it, we just won a contract for 4 million tests in Brazil. And we're able to take it -- take on that business even at the appalling real to the dollar ratio, which I think is at 4 now at this moment in time. But given that we're manufacturing there and we're matching our costs with our revenues in reals, we're able to take that on.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [10]

--------------------------------------------------------------------------------

Okay. And then the hemoglobin variant -- version, is that submitted or is that still to be submitted to the FDA?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [11]

--------------------------------------------------------------------------------

Well, it was submitted and the FDA came back with more queries, and so we're basically resubmitting now -- just about to resubmit. And we think the resubmission will go -- and so basically, the FDA came back with questions. Questions to the extent that you could call it's virtually a resubmission. So we're making the resubmission in the next 6 to 8 weeks. We expect we'll definitely be in by the 1st of October. And then hopefully, we'll get approval in 3 months. But just to be safe, I'm saying, first half of 2020.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And then the automated Slide reader, what was the status of that? Is that going to be...

--------------------------------------------------------------------------------

Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman & CEO [13]

--------------------------------------------------------------------------------

Well, that, for us is very, very well. But I mean, that's longer, that's out in -- towards the end of 2021.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [14]

--------------------------------------------------------------------------------

Okay. All right. And so, overall though, now that you have Premier up and running in Brazil, it sounds like you've had some timing issues with the African business. Is it safe to assume that revenue in the back half of '19 will be higher than revenue in the front half was?

--------------------------------------------------------------------------------

Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman & CEO [15]

--------------------------------------------------------------------------------

Yes. Solidly higher. Yes. Absolutely. We've got comp on some timing issues there at the end of June, which served to make this quarter look really weak. But quarter 3 and 4 for HIV is much stronger. And as I indicated, I believe that our overall revenues for the year in terms of HIV in Africa will be broadly in line -- maybe somewhat behind, but broadly in line with 2018.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [16]

--------------------------------------------------------------------------------

Okay. All right. And then in terms of cash, I know you have one more -- it sounds like you have one more tax payment to make this year. Are there any other big payments due in 2019?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [17]

--------------------------------------------------------------------------------

The -- so we have a tax payment that we have to make, and that's the only nonnormal payment that we have to make in terms of large payments. But we obviously have our second bi-annual interest payments in quarter 4. It should be $2 million, which -- you'd be familiar with that, every 6 months that comes, so every second quarter.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [18]

--------------------------------------------------------------------------------

So do you think that -- when do you think cash will start to grow on the balance sheet? Is that something that you'll bottom out at the end of this year?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [19]

--------------------------------------------------------------------------------

So I mean, you heard Ronan that Ronan mentioned the fact -- yes, so Ronan has mentioned the fact that we expect that the second quarter -- second half of the year will be a lot stronger. And as you all have known, in terms of our profitability, but then consequently in terms of our cash, it's very much influenced by the top line. So we're very much targeting being cash flow breakeven for the second half of the year. But obviously, a lot depends on the revenues and the extent which we get those revenues to be cash flow breakeven for the second half of the year, and may possibly even exceed depending on how strong the revenues are. Obviously, that's without taking into account the tax payment, which is yet to be made and which will fall into the second half of the year.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [20]

--------------------------------------------------------------------------------

But that does account for the interest payments?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [21]

--------------------------------------------------------------------------------

It ought to have.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question will come from William Lapp private investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [23]

--------------------------------------------------------------------------------

Ronan and Kevin, I just have one question. I'm limited as a shareholder. But how did you miss $5.4 million in this tax problem with the payroll? How did that occur?

--------------------------------------------------------------------------------

Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman & CEO [24]

--------------------------------------------------------------------------------

Yes. So we were subjected to a routine tax audit in one of our subsidiaries, and that covered about a 10-year period? And a part of that audit, a tax liability in relation to payroll taxes was identified. It was a quite technical in nature. We have strong arguments in relation to the approach we adopted and, consequently, both ourselves and the tax authority in question, reached a negotiated settlement. And that broadly approximates to about $500,000 per year when you take into account the interest that was, obviously, applies to it as well.

--------------------------------------------------------------------------------

Unidentified Shareholder, [25]

--------------------------------------------------------------------------------

But wasn't our statute of limitations like 6 years on some of that?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [26]

--------------------------------------------------------------------------------

There are different statutes of limitations depending where you operate.

--------------------------------------------------------------------------------

Unidentified Shareholder, [27]

--------------------------------------------------------------------------------

So this was a U.S. subsidiary right?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [28]

--------------------------------------------------------------------------------

At this point, we're not disclosing in which particular jurisdiction that the (inaudible). Given we've reached a settlement with the respective tax authority.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question will come from Jonathan Sacks with Stonehill Capital.

--------------------------------------------------------------------------------

Jonathan Scott Sacks, Stonehill Capital Management LLC - Managing Member [30]

--------------------------------------------------------------------------------

Can you provide a little more insight into the movements in cash? I think your cash on hand came down by about $5 million. And I was hoping that had been due to the tax payment, but it sounds like you haven't made the tax payment yet. So may be -- so 2 separate questions. One, explain the change in cash balance. And second, can you explain the timing of payments under the tax settlement, and have we made any of those payments yet or is that a $5 million cash outflow that is still yet to come?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [31]

--------------------------------------------------------------------------------

Essentially -- I'll just take the second part first. Essentially that will be paid -- I expect it'll be paid in quarter 3, it could drift in quarter 4 but it has not been reflected yet. So you'll see us -- either all in quarter 3 or all in quarter 4, it won't be phased as such.

Going back then to the movement this quarter. Every second quarter we will have an interest payment. So we didn't have one in quarter 1, we have one in quarter 2 and that takes into account 6 months of interest. So quarters 2 and 4 are always going to be heavier from a cash burn perspective. So you're seeing $2 million of the reduction arose due to interest, of which, half basically refers to the period in question. The -- in terms of the other major movements, we would have CapEx of approximately just over $3 million, which is down from about $3.8 million in the previous -- quarter 2. And that is obviously offsetting and more than offsetting the cash that we generate from operations, which is about $1.5 million. But more -- probably a better way of looking at it is, if you take the lease payments of $750,000 off, it's probably about $800,000. So cash from operations about $800,000 offset by CapEx of approximately $3 million and then 6 months of lease interest, which is $2 million -- sorry, notes interest, which is $2 million.

--------------------------------------------------------------------------------

Jonathan Scott Sacks, Stonehill Capital Management LLC - Managing Member [32]

--------------------------------------------------------------------------------

Okay. And the tax payment is just -- it is $5 million or is just a little over $5 million?

--------------------------------------------------------------------------------

Kevin Tansley, Trinity Biotech plc - CFO, Company Secretary & Executive Director [33]

--------------------------------------------------------------------------------

It's about $5.5 million.

--------------------------------------------------------------------------------

Ronan O’Caoimh, Trinity Biotech plc - Co-Founder, Chairman & CEO [34]

--------------------------------------------------------------------------------

Okay. As we appear to have no more questions, I'll just close the call. And thank you for your support. Good afternoon.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

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