Trinity Biotech plc (NASDAQ:TRIB) Q3 2022 Earnings Call Transcript

Trinity Biotech plc (NASDAQ:TRIB) Q3 2022 Earnings Call Transcript December 15, 2022

Operator: Good day. And welcome to the Trinity Biotech Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Joe Diaz: Thank you, Kate. And thanks to all of you for joining us today to review the financial results of Trinity Biotech for the third quarter of 2022, which ended on September 30, 2022. Joining us on today's call are Aris Kekedjian, Chief Executive Officer; and John Gillard, 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, let me inform you that statements made in this conference call may be deemed forward-looking statements within the meaning of federal securities laws. These statements are known -- these statements, excuse me, these statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

These risks include, but are not limited to, those set forth in the risk factor statements in the company's annual report on Form 20-F filed with the Securities and Exchange Commission. Trinity Biotech undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrence of unanticipated events. With that said, I will now turn the call over to John Gillard, Chief Financial Officer, for a review of the financial results. He will be followed by Mr. Aris Kekedjian, Chief Executive Officer, who will provide additional background on revenue for the quarter and the overall business. After which, we will open the call for your questions. John, the floor is yours.

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John Gillard: Thank you, Joe. Good morning, everyone. Now I will take you through the results for Q3 2022. Starting with revenues, total revenues for the quarter were $19.5 million, compared to $22 million in Q3 2021. Aris will discuss revenues in further detail later on the call. As such, I will move on to discuss other aspects of the income statement. You will have seen from our income statement that we have recorded significant excess and obsolescence charges related to inventory of $4.7 million this quarter. As this amount is material to the results this quarter, I will now bring you through the components of this charge. Firstly, there is a Viral Transport Media inventory write-down of $3.5 million. As we have talked about on recent earnings calls, the situation relating to COVID-19 products has been fluid and hard to predict.

Last year, when demand for PCR VTM products diminished, we took back our production. We decided to retain the capability to flex manufacturing volumes should market conditions warrant. As part of this strategy, we maintained an inventory of critical raw materials to allow a ramping up of VTM production to meet peak demand and it was important that we were able to fulfill high volume orders at shortened orders in order to retain existing customers and capture new customers at attractive price points. So far we have not seen any evidence of current or future significant peaks in demand for PCR or VTM products this season. So we revised our strategy of maintaining significant levels of raw material inventory to meet demand peaks. We now intend to sell the vast majority of this inventory, which given current market conditions, is expected to be at lower prices.

Consequently, the value of inventory has been written down for an estimate of its net realizable value. Secondly, we have written down the value of certain excess raw materials and work-in-progress following a review and update to our relevant quality assurance policy. This amounted to a charge of $900,000. The third and final charge relates to write-down of Tri-stat inventory and amounted to 300,000 barrels. We undertook a strategic review of our Tri-stat instrument as part of a broader review of our haemoglobins product portfolio. With annual sales of approximately $200,000, Tri-stat is the least significant product in the portfolio. To simplify the haemoglobins product portfolio and to allow us to focus our resources on the higher growth products, we have decided to limit sales of Tri-stat to certain targeted partnerships.

Consequently, we have written down the value of this inventory to affect the consequently revised outlook. All of what I have mentioned so far contributed to a gross margin of 10.3% this quarter. Excluding these significant inventory write-down, the gross margin for the quarter would have been 34.4%, compared to 40.4% achieved in Q3 2021. As was the case in the first two quarters this year, the reduction in gross margin this quarter is mainly due to the very strong sales and margins recorded in the comparative period within our COVID-19-related portfolio of products. Since then demand for COVID PCR tests have or has fallen significantly in North America. Additionally, our gross margin this quarter has been negatively impacted by rising prices for raw materials and an under recovery of labor and overhead costs at three of our manufacturing facilities due to reduced production activity.

We addressed the latter problem by reducing headcount of two of the affected production facilities. In relation to the other site in Jamestown, New York, we have started the process of transferring in autoimmune product manufacturing, which up to now has been done at our Buffalo, New York site. In terms of dealing with margin erosion, which has come from rising input prices, we have already put through some sales price increases where market conditions allowed and we continue to monitor the opportunities to implement additional price adjustments in the short-term, but subject to consistency with our broader strategic objectives. Moving on to our R&D expenditure, which was $1 million in the quarter, down by $40,000 compared to Q3 2021. Meanwhile, SG&A expenses in the quarter were $5.8 million, down approximately $320,000 compared to Q3 2021.

We continue to focus on operating efficiency and cost control, have continued to reduce head count as we pursue greater automation and simplification of processes. We are also benefiting from a stronger U.S. dollar against the euro, which is reducing our substantial euro/denominated SG&A expenses. Offsetting this are additional travel and trade show related expenditures, reflecting an increase in sales and marketing, and senior operational staff travel post the lifting of many COVID-related travel bans. We believe it's important for our sales and marketing staff to resume face-to-face interaction with our customers and partners as a key component of rejuvenating our sales revenues. In addition, we also believe it is important the key operation leaders, many of which we have recently recruited have the opportunity to visit our various sites, so we can aggressively execute on our operational efficiency objectives.

We have recorded impairment charges of $2.3 million this quarter compared to 0 in Q3 2021. The development project for the autoimmune smart reader was paused earlier in 2022, as we review other options, including the potential to proceed with a third-party reader instead of our own internally developed reader. Following this review, we determined that there were likely greater opportunities to capture more market share in a more capital efficient manner through partnering with a third-party reader manufacturer were pursuing an independent strategy. At this point in time, there is significant uncertainty if we will complete the project to develop our own in-house autoimmune smart reader and that's why we may revisit this decision in the future, in the interest of prudence, we have fully impaired the project's carrying value of $1.3 million.

The remainder of the impairment charge relates to Tri-stat. As I mentioned earlier, we undertook a strategic review of our Tri-stat instrument as part of a broader review of our haemoglobins product portfolio. In order to rationalize the haemoglobin's product portfolio and to allow us to focus our resources on the higher growth products within that portfolio, management decided that Tri-stat treat sales will be restricted to only certain targeted partnerships and this has led to an impairment to the carrying value of the Tri-stat tangible assets. This resulted in an operating loss for Q3 2022 of $7.1 million, compared to an operating profit of $2.8 million reported in Q3 2021. I will point out that, this quarter we have zero Paycheck Protection Program income and in the quarter -- comparative quarter, just over $1 million of PPP income was recognized.

The other drivers of that reduction in operating profit are the lower revenue and margin contribution from our COVID-related portfolio of products, the significant inventory write-downs and the impairment charges, as well as the aforementioned impact of inflation and under recovery of overheads. Moving on to net financial expenses of $1.9 million in Q3 2022, which compared to $1.2 million in Q3 2021. The increase is mainly due to higher interest rates applying to our borrowers post the refinancing. We replaced exchangeable notes with a coupon rate of 4% with a senior secured term loan with an interest rate of approximately 13.5%, albeit the net amount now borrowed is substantially lower. In dollar terms, the interest expense is $600,000 higher this quarter when comparing the interest expense for term loan versus the exchangeable loans that replaced.

Additionally, in 2022, we issued a seven-year convertible note and the total cash and non-cash interest expense for this debt is approximately $260,000 in Q3 2022. Lastly, we recorded a fair value adjustment on derivative balances related to the term loan with this quarter with income of approximately $300,000. In the comparative period, we had fair value adjustments on derivative balances related to the exchangeable notes, which is a financial income of just under $200,000, thus after tax was $8.9 million in Q3 2022, compared to a profit of $1.3 million in Q3 2021. As in prior quarters and as set out in the press release, we quote earnings per ADS effectively or equivalent of EPS. In Q3 2022, the loss per ADS was $0.235 , compared to a profit per ADS of $0.063 in Q3 2021.

I will now move on to address some of the main balance sheet movements we have seen since quarter two 2022. Intangible assets decreased by $1.6 million. This is made up of additions of $1 million, which mainly comprises capitalized R&D expenditure, partially offset by amortization of $300,000 and the impairment charges for the two development projects of $2.3 million. The amount of capital R&D expenditure reduced this quarter compared to recent quarters and this is because several of the main projects we have been working on have reached the final phase of development, and in the final phase, fewer resources are typically required. Inventories decreased by $5.6 million, mainly due to the significant excess and obsolescence charges I talked about earlier.

Excluding these significant inventory provisions, our level of inventory has reduced by 3% since the end of Q2 2022. This is an area we are targeting, and we have an ongoing project aimed at optimizing our inventory levels going forward as part of our focusing on improving the overall effectiveness and efficiency of our supply chain. Accounts receivable balances, on the other hand, have increased by 8% and this is mainly a function of the increased sales this quarter. Finally, I will discuss our cash flow for the quarter. Our cash balance decreased by $3.2 million to $7.3 million in Q3 2022. Cash generated from operations for the quarter was $700,000, an increase of about $100,000 compared to Q3 2021. In the first quarter of this year, we reported positive cash flow from operations and this is a result of trimming our cost base and better working capital management.

Capital expenditure cash outflows comprising PPE and R&D spend are $1.3 million, a reduction of $700,000 compared to the comparative period. Interest payments in the quarter were $1.7 million. I will now hand it back to Aris who will bring you to the revenue. Thank you.

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Aris Kekedjian: Thank you, John. I'd like to take a few minutes before we answer any questions to go through the highlights for the quarter. Total revenues for Q3 2022 were $19.5 million. Excluding our COVID-focused PCR products, Q3 2022 revenues of $19.2 million were marginally higher by 2% compared to Q3 2021 and were up 6% Q2 -- compared to Q2 2022. So we have sequential -- some sequential growth of around 6%. A strong year-over-year increase of 30% revenues attributable to both our haemoglobins and Fitzgerald businesses, offset the timing impact of atypical concentrated sales associated with Uni-Gold HIV in Q3 2021. In addition, we put through pricing changes and optimized capacity in our autoimmune products business and that's led to a 30% increase compared to the same period last year.

Quarter-over-quarter revenue momentum was once again driven by Fitzgerald at about 25% and this reflects actions that we have taken to optimize demand generation throughout the year. We also had some strong demand for the Uni-Gold HIV product on a quarter-over-quarter basis up 35%, and as I previously mentioned, the actions we took in autoimmune resulted in a 20% quarter-over-quarter growth in the autoimmune products. We are experiencing particularly strong demand for our haemoglobin products in Asia-Pac and Latin America, with a well over 50% year-over-year revenue growth in Asia-Pac and over 40% in Latin America. We continue to scale our commercial coverage in these markets where the increase in diabetes and propensity for haemoglobin variants is at some of the highest rates and our boronate affinity technology has a particular competitive advantage in this area, given that it mitigates and limits interference associated with variables -- variants, excuse me.

The other thing that I am particularly focused on with respect to our global growth is in relation to distributor coverage. So we have also undertaken a significant review of our gaps in distribution and I expect to meet the bulk of our distributors in February in the New Year. Preliminary estimates for Q4 indicate significant continued growth momentum in haemoglobin instrument placements and steadily improving global HIV test demand, including new Uni-Gold orders from Ethiopia and preliminary trend screen orders from Kenya. These increases are expected to offset lower Q4 revenues to share, reflecting the demand generation in previous quarters. But we expect the year to end at around $75 million run rate for -- on an annual basis. In late August, the company submitted its 510(k) submission to the FDA seeking U.S. regulatory approval for Premier Resolution, our Haemoglobin Variants instrument.

We are expecting to launch this product in Q2 of next year and we remain on track, hopefully, in line with what your expectations are. In November 2022, the company initiated the development of its next-gen flagship diabetes HbA1c instrument, the Premier 9210. We are expecting to launch in Q3 this revised instrument of next year. It is planned to feature an improved backward compatible reagent column system that will feature up to 3 times the injection capacity and stability. It requires limited calibration and improves user interface and lapse system integration. In addition, this system should underpin the lower cost mid-throughput A1c instrument currently in development. We think this product launch and the associated redesigns associated in conjunction will give us substantial gross margin improvement in our haemoglobins business over the next couple of years.

Since the World Health Organization approval in February 2022 of our TrinScreen product, the Kenyan Ministry of Health task force recommended it as the first line screening test for Kenya's new HIV testing algorithm. We expect to conclude the current pilot program that's underway. We expect that to end probably sometime close to year-end and we believe that we are going to be delivering Ministry of Health orders in Q1 and ramp up to approximately 6 million tests a year. The company is in partnership negotiations with a number of rapid best innovators. Our intention here is to leverage our lateral flow biological development and manufacturing capabilities and also provide access to our global distribution channels. In addition to capital efficient growth, this strategy provides early access to intellectual property associated with evolving user interface concepts.

We have been implementing improved design for manufacturing, supply chain and other in-sourcing enhancements in order to significantly optimize margins across the portfolio. In Q3, we focused on streamlining the portfolio with the elimination of loss-making legacy products and inventory, much of what John explained to you earlier. We continue to consolidate multiproduct flexible production in our Jamestown facility with the transfer of our immunofluorescence and urine tube manufacturing activities from Buffalo, New York and Burlington, Canada, respectively. The company continues to focus on attracting and developing world-class leadership. We recently appointed a new Chief Technology Officer, a Global Head of Quality and Regulatory Affairs and Global Supply Chain leaders, all critical in driving our growth strategy that I reviewed last week at the Piper Sandler Conference, where I outlined the company's strategy and our focus around key initiatives.

You are welcome to take a look at a copy of the presentation. It's on our website. And with that, I think, we will open it up to questions.

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