Trinity Biotech PLC (TRIB) 2006 Q1 法說會逐字稿

Good evening ladies and gentlemen, and welcome to the Trinity Biotech first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Ronan O'Caoimh, Chairman and Chief Executive Officer of Trinity Biotech. Thank you. Mr. O'Caoimh, you may begin.

Good afternoon and welcome to the Trinity Biotech first quarter conference call. I'm joined here in Dublin by Brendan Farrell, our President, and by Rory Nealon, Chief Financial Officer. Firstly, Rory will speak about the results for quarter one, then Brendan will then give the sales and marketing update, and I will speak about our recent fund raising before finally opening the call to a question-and-answer session.

However, before I commence, I'm required to read the Safe Harbor provision as follows. Forward-looking statements in this release are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. 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.

And now, I will hand you over to our Chief Financial Officer, Rory Nealon.

Thank you, Ronan. You are all used to the format by now, I'll start with an overview of the key items in the income statement, in particular comparing quarter one with the equivalent period last year, and I'll also review -- I'm sorry, in reviewing those key items in the income statement, I will only briefly touch on revenues, and then Brendan will give you some more -- a more detailed explanation later, and finally I will take you through an overview of the most recent March balance sheet versus our December balance sheet.

So, moving on to the details of the numbers and starting with revenues, you will note from the press release that there is as always an analysis of the key product areas and also by geographic location. At a top level, you will note that our sales for the year have grown 16.4% over the same period last year. And as you all have heard me mention before, when assessing Trinity's performance, it is important to compare individual quarters with their respective prior quarter due to the seasonal nature of our business. In this context, it is worth reminding you of what I said on the last conference call, namely that quarter one is typically our quietest or slowest quarter, unless there is a strong flue season, which there has not been with -- for Trinity for a couple of years now. And then, in quarter two, what typically happens is our sales of flu antibodies from our Fitzgerald's business, and also our lyme sales begin to pick up, flu antibodies being strong as diagnostic companies begin to acquire those critical raw materials during the summer months for the manufacture of flu tests for the winter period, and lyme sales beginning to grow as it is actually a summer disease. Just to give you a couple of numbers, quarter three -- well to step back a bit, quarter three will typically see our flu antibodies and lyme reach their peak And to give you those numbers, to give you a feel first, we sold approximately 7.7 million of lyme last year, with the majority of that being in quarter two and quarter three. And to further make that point, our quarter one sales of flu antibodies has gone-- tend to be, in fact were less than 10% of the annual sales of flu antibodies last year. So, hopefully, I am getting the point across that we are a seasonal business now, post the acquisition of Fitzgerald, and quarter two, quarter three tend to be bigger quarters.

And finally, just to note that the rest of the products would typically be flat unless the timing of orders of some distributors would be out of sync, and Brendan will elaborate upon that more later on. Moving on to the gross margins, in each conference call, I remind you of the key drivers of those gross margins, and you will recall me mentioning items such as product mix, channel to markets, i.e., direct as opposed to distributor net sales, geographic mix, and finally the effect of instrument placements with our coagulation and our Primus instrument sales tending to bring down the average margin. Our margin for this quarter is up to 50.5% from 48.7% in the comparable quarter last year of 47.9% for the year as a whole last year. One of the key drivers of this increase has been the fact that the level of sales of instruments is lower this quarter than recent quarters. I remind you that we typically place instruments at break-even or low margin and also the sale of the instruments can be lumpy. In fact, in the current quarter, our sales of such instruments are down by about 1.2 million on the previous quarter, as much due to the fact that previous quarter was particularly high, but obviously a lower proportion of instruments has a positive impact in the gross margin percentage as has happened this quarter.

Moving on to our administrative expenses, on the face of it, our total administrative expenses have increased by 21% from 7.6 million last year to 9.2 million this year. This is largely due to the impact of the RDI acquisition in March 2005 and the Primus acquisition in July 2005. In fact, if you compare like with like, and if you take the administrative expenses for the second half last year or rather post the acquisitions and compare that run rate to the current quarter, we are looking at an increase of only 2.9%, which is inflationary driven. So, our indirect costs have been pretty much flat quarter-on-quarter in the recent quarters. To conclude on the analysis of indirect costs, you will note that our R&D are broadly constant with the comparable period last year and the share option expense is also comparable with the run rate for the year as a whole last year.

Moving on to our financial expenses, in fact, it is something I've got a lot of question about and not something I have talked to on this call a lot before, but just to give you a feel for the make-up of that expense, it essentially consists of interest on our bank loans of 13.3 million at a rate of about 5.7%. We also have interest on our convertible debentures at an effective rate of approximately 6%, being about 110,000 for the quarter. But, you should note that that 6% effective rate in the convertibles has two components, namely a 3% cash rate, if you like, payable to the convertible holders and an IFRS or imputed rate of a further 3%. And please note that that's not an amount that will ever be paid to any one, it's merely an accounting or book entry. And finally, and lastly, there is some interest payable on our Primus deferred consideration of approx. 30,000 in the quarter.

Regarding our taxation, you will note that the effective rate for the quarter was 11.4% as compared to a rate of 8.9% in the same quarter last year or 11.3% for the year as a whole last year. So, it is comparable with the year as a whole last year. Before moving on to the balance sheet, it is worth discussing our operating margin, which is most important metric that we track. You would have heard us say in many occasions that our goal is to get our operating margin before share option costs back above 12% where we were before we launched our direct sales force in the USA, and which I might add is also the industry standard. As I have just noted, this is the key performance indicator in assessing how Trinity is performing. The margin for the quarter was 8%, which is higher than the 6.8% equivalent in quarter one last year. It is also in excess of the quarter two performance last year at 7.4%, and is the same as the quarter three performance of 8%. In fact, the only quarter that was higher last year was quarter four, which was a particularly good quarter with high revenues. Considering that quarter one is typically our slowest quarter we have each year and that the revenues are a large driver of this percentage, it's been a really good performance to beat or match the quarter two and quarter three levels from last year. And finally, it's worth reiterating what've been stating recently and that is namely our goal is to get that percentage back up above 12%, and in fact to do so by the end of this year.

Let's talk about our balance sheet. As mentioned at the start, I propose to compare the position at the end of March to the December balance sheet. In terms of our fixed, our non-current assets you will note from the press release that they broadly constant with the December levels. Our inventories have increased from 36.5 million in December to 38.2 million now, and a large element of that in fact is actually seasonal again. And particularly, as we build-up inventories in anticipation of the lyme season, which I'll remind you is a summer disease. Further, the level of our inventories is broadly consistent with the levels of the last five quarters, which have ranged from 36 million to 38.6 million. In other words, we have kept our inventories relatively constant over those quarters despite the underlying growth in our business.

Finally, to touch on our cash and our gearing, there has been some movement here during the quarter, largely associated with previous acquisitions, debt payments and convertible debenture payments. During the quarter, we paid almost 3 million additional consideration to the shareholders of Primus by way of an earnout based on their 2005 performance. As mentioned, actually there is also further 3 million just by way of information due to Primus for deferred consideration in July of this year. We also paid out during the quarter approximately 1 million to the Fitzgerald's shareholders, again based on performance in 2005 and at this point, I'll just note that there are no further payments due to anyone in respect of historical acquisitions other than the 3 million deferred consideration to Primus, which is due in July. Other key cash movements during the year include the 1.3 million repayment of debt and also 1.8 million repayment of our convertibles, and I would also note that we just repaid a further 1.8 million of convertibles on the first of April or the first day of the current quarter. Before concluding on the balance sheet, the position would obviously look a lot different next quarter with the injection of the net 24 million from the recent fund raising, which Ronan will talk to shortly.

So, in conclusion and to wrap up, I'd just like to reiterate a few points. Firstly, our top and bottom line performance is once again better than the equivalent period last year and getting there our gross margin is in excess of the equivalent period last year and in fact in excess of the period of the whole last year. Our operating margin of 8% exceeds or equals the performance for each of quarter one, quarter two and quarter three last year, and finally we have recently significantly strengthened the balance sheet with a 24 million cash injection, which once again Ronan will talk to in a second.

Thank you, Rory. I would like to provide you with more details around our revenue numbers for quarter one of 2006. And I'll give you these details in the categories in which we manage and report our business namely, infectious disease, coagulation, clinical chemistry and point of care.

Starting with infectious disease, in 2005, you would recall that we grew our infectious disease by 21.1% to 44 million. Leaving out the impact of the acquisition of RDI, the year-on-year growth was 10%. In the quarter one just gone past, we grew 6% over quarter one of '05. This is a strong performance yet again in light of the fact that sales of our respiratory products were lower than we have historically encountered. During quarter one, we launched the [Adaltus] next gen instrument in certain key markets outside the United States, and we are very confident that the next gen platform will provide us with a strong base for continued growth in this product segment, which we believe we can continue to grow organically at a double-digit growth rate throughout 2006.

Moving to our coagulation business, we see here that sales in coagulation segments are lower than our normal quarterly run rate. This is simply due to the timing of delivery into some of our larger distributors, and these deliveries will now occur in quarter two of '06, which is of course the current quarter. As I indicated in our call last month, our Destiny coagulation instrument has been an outstanding success, with more than 160 placements worldwide since it was launched in the second half of '05. Towards the end of quarter one 2006, we launched the Destiny OPT, which is a smaller version of Destiny analyzer and which is aimed at the smaller hospital segment. We are confident that the Destiny OPT will drive further growth in our coag business and we confidently expect that the organic growth rate for 2006 in this segment will be comfortably in excess of 12%.

Moving now to clinical chemistry. This segment had revenues in 2005 of 11.9 million. And the main focus here in this segment is on hemoglobin A1C testing, a market which is growing rapidly due to the increase in the incidents of diabetes. In the United States alone, there are now 21 million people or 7% of the population who are diabetic and a third of those are unaware that they have the disease. The disease is also growing rapidly in significant markets outside the USA such as India and China. We believe that the prospects for growth in our Primus business are excellent. In quarter one of '06, we launched the Primus system to our own direct sales force in Germany, where there is a significant market for hemoglobin A1C testing. Again, we expect organic growth to be strong in this segment in 2006.

Finally, I'd like to discuss our point of care business. As you may recall, 2005 was an outstanding year for this product group, which is mainly made up of our Rapid HIV products. In 2005, we grew 31% over 2004 with revenues of almost $13 million. In the quarter just gone, we increased 28.7% over quarter one of 2005. In fact, quarter one of 2006 was again a record quarter for our Rapid HIV product sales. We continue to be very optimistic for growth prospects in this segment both outside and inside the United States. On March 10th, 2006, we participated in the meeting of the Blood Products Advisory Committee of the FDA. The Blood Products Advisory Committee discussed a pathway to approval of an over the counter Rapid HIV tests. This was an extremely valuable discussion and as a result, we have submitted our proposals for clinical trials to the FDA and will meet with them to discuss these proposals in mid May. It's our intention that we would commence clinical trials once protocols have been agreed with the FDA. We are very excited about the prospects that our products could be sold over the counter in the United States and used in a home environment. We turn now to look at our business from a geographic standpoint. All three regions increased substantially over prior quarter, with the Asia/Africa region having the strongest growth at 24.6% and this was mainly due to growth in our Uni-Gold HIV product.

In conclusion, if we look at our business overall, we are very confident that we can maintain our rate of organic growth in excess of 12% per annum and we look forward to continued success throughout 2006. And with that, I'll pass you to Ronan.

Thank you, Brendan. I'm just going to briefly talk about the fund raising. On the 6th of April, we completed a fund raising of $25 million with the issuance of 2.9 million ADRs. The offer was well oversubscribed and the shares were placed with blue chip institutions in the United States, the UK, Switzerland and Ireland, with Roth Capital acting as placement agents. The purpose of the placement was to enable us to react quickly in the event of a suitable acquisition being identified. The combination of our increased cash balances, our positive cash flows and banking facilities enables us now to seek acquisitions of greater size than we previously have done and we are currently seeking such an acquisition. And so, if I could now hand you back to the operator for questions, please.

[OPERATOR INSTRUCTIONS] Sean McMahon, Kennedy Capital Management.

Hi guys. I'm sorry I jumped in on the call a little bit late. I just had a question on coagulation, looks like it was down. Can you just quickly go over that again for me?

Sure, Sean. Hi, this is Brendan here. Just to reiterate what I've said, it's really just simply to do with the timing of shipments to some of our larger distributors here outside the United States, and these shipments will occur in quarter two of '06. So, it's merely a timing issue, it's nothing fundamental to do with the business.

Excluding those timing issue, what would have been -- what kind of would you look it at for the actual sales, then?

We would be looking at something approximately in the region of 400,000 to 500,000 in terms of mistimed orders, if you want to put it that way.

Okay. And then on the acquisition front, are you guys -- or how serious is that kind of pipeline looking for you right now?

This is Ronan here. We're always looking at stuff and so, we're having a serious look at a number of possibilities, but we have nothing further really to report than that, as we are always looking at stuff but -- and [Inaudible] at an advanced stage, but we were looking at, we're looking at stuff, but there's nothing to report at this moment.

[OPERATOR INSTRUCTIONS] Ian Hunter, Goodbody Stockbrokers.

Good afternoon gentlemen. Maybe further on your Uni-Gold HIV Rapid test, you gave us an idea that you're looking to get it, Ronan, in the over the counter markets and there is an approval process. I am just wondering if you can give us an indication of the scale of the trials required by the FDA, the timeline of these trials, and for the additional R&D costs, do you think that's going to be through FY06 as the trials run through? And also, maybe on a broader scale, maybe give us an idea of what else you have in the R&D pipeline?

Okay and hi, this is Brendan here. Just in relation to the approval for Uni-Gold HIV OTC, as I indicated, we have made certain proposals to the FDA about how we believe we should go about those clinical trials, and it's a matter of meeting with them and getting their approval, and their agreement on our proposals. But, let me say this, the efficacy of the Uni-Gold HIV product has already been well proven in the FDA approval process for the product itself, and during those clinical trials, we tested 9,000 patient samples, came up with a sensitivity of 100%, and a specificity of 99.7%, my point being that the product works, is proven to work, and we know that it works. So, the nature of the trials, which we are addressing, are simply, can this product be run accurately, conveniently, simply by somebody in the privacy of their own home? And our design of the trials addresses those particular issues. So, we don't see that we will need very extensive clinical trials. But, however, it's early days yet and we don't know whether the FDA will agree with our approach or not. So, to answer the question specifically about incremental R&D or clinical trial costs, we would consider that these should be relatively modest if the FDA agrees with our protocols.

And just, Ian, to deal with your question about the R&D pipeline, I just mentioned the four principles and the most exciting things that are in the pipeline. In the Rapid area, the Rapid flu test, which is in trials, in coag, basically a super destiny, a large-sized -- the super-sized machine, in hemoglobin, a Rapid HB A1C test, which can compete with Bayer who's Rapid products are doing in excess of $100 million a year at the moment, which is a rapidly growing area. And in infectious disease, our rapid [HFIO], our HIV Western Blot test, which is currently in trials as well and we could hope to have out probably in quarter one of next year. So, really very exciting, just one exciting -- one exciting product in each of the four areas in which we operate.

[Caroline Conroe], Montgomery & Co.

Hi, thanks for taking my call. Couple of questions for you regarding operating margins. You mentioned that the lower operating margins are due to lower -- I'm sorry, the implementation of your US sales force. I was wondering if you could give us update on the US sales force, in my last notes, I think have a total of 120 people and then just what areas those sales people are emphasizing in the US?

Hi Caroline, this is Brendan here. Yes, that's correct. We did point out that the fall in the operating margins post 2003 was due to the increment investment in the US sales and your notes are correct. There are approximately 120 people on the ground there in sales, marketing, tech support, engineering and customer service. We are glad to say that we are pleased with progress in the United States and we would always like to see more sales coming through the sales force. But, I should also emphasize that we believe that we have the infrastructure in place now that could handle substantially more product and we certainly keep that in mind in our screening of potential acquisitions. In other words, looking at acquisitions that might have a strong sales base within the United States, within Germany, and within the UK where we have our own direct sales operations.

Okay, very good. My other question relates to the over the counter HIV test. There has been some conversations about HIV-1 versus HIV-2. I know you guys have HIV-1 Uni-Gold product. I think from previous conversations, you also ran some trails using the HIV-2 and I was wondering if you had any indication from the FDA at all that HIV-2 would be necessary going forward and if so what would be the implications for you?

We've had absolutely no indication whatsoever from the FDA that there will be any mandatory requirement for HIV-2 testing. As you know, there have been, as far as I recall, 75 cases of HIV-2 infection in the United States since 1984. So, the incidence is extremely low and at a level, which doesn't appear to perturb the FDA. So, we don't see any requirement for that at this moment of time.

Okay, very good. It seems like your communications with the FDA are right in line with what the competition is doing, at least your major competitor. Have you ever got any information on the new competitor to the American market that one just started, Cambio? They don't have a [clear] waiver yet. Any incremental information there?

No. We know Cambio, but they operate outside the United States without any huge success, I might say. They are not yet approved, Caroline. They have an approvable letter, which should eventually lead to approval. And whether their test is [clear waivable] or not, I am not clear. I think that it is, Caroline, but I am not certain.

Okay. Thanks. And finally, could you just talk about your over the counter markets? You estimated a $100 million market size. Can you just run through how you come to that number?

I should say it's a fairly initial estimate and it hasn't been absolutely verified by third party yet, but it's our stab at it right now.

[Mark Lifton, Lifton Pension].

Good morning. How are you folks? Good afternoon, actually. The question was basically twofold. One is, where are we with the Wampole litigation and the second question was, wasn't there a diabetes test that was momentarily pending approval and what is happening with that?

Mark, this is Ronan.

Hi, Ronan.

The rapid -- there was an HPA with the diabetes products, a rapid one, it's called Rapid Gel, and which -- FDA approval is pending. Remember, I mentioned that as one of the four exciting products that we have in R&D, but -- so it is awaiting approval, as we speak.

Is there a timeline in that that you expect or are we just at the mercy of the FDA and it is indefinite?

We are, but we would expect it this quarter.

Which is, well, what we said on the last conference call, Mark, nothing has changed.

Okay.

So, we are expecting an approval on that product this quarter before the end of June. But, yes, we are at the mercy of the FDA, but it is moving along very nicely. And as I mentioned, Rapid HB A1C testing is a very rapidly increasing market and if I have a product, a blockbuster product -- there is not many blockbusters of diagnostics, but they have one product, which as we understand, is in excess of $100 million and it has one new competitor now with the Afinion from Axis-Shield, and hopefully by the end of quarter two, it will have a second competitor with our Rapid Gel product. And then, the second part of our -- the first part of your question, Mark, was with respect to the Wampole litigation. Just to say that that is -- we are getting kind of typically good [Inaudible] kind of business and are off the litigation. And so, we are just starting dispositions and just to make the point that we are extremely bullish about the outcome and as the discovery process has continued, our bullishness has been greatly enhanced. We are quite confident in terms of the outcome there. We feel grievously wronged.

And I think you are absolutely correct. And from what I know about it, I think your feelings are justified.

[OPERATOR INSTRUCTIONS]. [Michael Feldman, HSB Capital]

Two quick questions. On the HIV test, I was wondering if you had seen any pick up in share in the US after the sort of high-profile hiccups that OraSure had and B, whether there had just been any general perception change in terms of Uni-Gold brand or OraSure's brand?

Hi, this is Brendan here. Yes, we certainly have seen an increasing number of people willing to trail the product as a result of the hiccups that our competitor has had. People have become a little bit uncomfortable with having a reliance on a single product. So, we certainly have been trailing our product in a number of sites as a result of that. And certainly, our brand image and our brand awareness has increased, I believe, quite strongly over the past few months so that HIV testing is not just synonymous with one person in the market and we are starting to get a significant profile there as well.

I think in addition, I think -- gradually, I think, there is an increasing awareness that oral fluid saliva testing brings with it a greatly increased level of false-positives. And so, that to an order of extent, there is a perceived advantage in terms of using saliva over blood. There is a clear proven disadvantage in terms of false-positives.

So, you are seeing a bit of a perception shift on that?

Yes, we are.

But, in terms of actual share, it sounds like there is maybe a slight uptick, but you see that more of as being an '06 gradual change, as your brand gets higher visibility.

We think that we are growing our shares in the hospital market. I mean, we had announced that it was 20% at Christmas. It continues to increase. If you ask a specific moment in time, it's difficult to assess exactly where it is. It's 20 something now. But, I mean the market is really the [play for] -- part of the OTC market is actually the public health market, all right. And there, I mean the competition is really as much -- the traditional laboratories have as much as the other approved products. So, really it beholds both participants in Rapid area to convert users from the traditional Rapid test. So, it's a great big market out there for both of us, and we are making good progress there. Obviously, some of the users within the public health market have a preference for blood and others have a preference for oral fluids. But, it's a great market available to both of us.

Okay. On the OTC test, is there any -- have you gotten any sense from the FDA, do you have any thoughts on your own whether a -- I mean obviously, there are advantages to a saliva test in the home markets, because it's -- people will be -- find it easier to use and the blood just is that much harder. Is that something that you see, keep making it, would the FDA's desire to be -- be to just approve one product and it might be a fluid product or is that not a big issue in your mind?

Well, first of all, there is a misconception there in what you said. It's not easier to do an oral fluid test in a home environment because the taking of the sample is relatively more difficult in terms of gathering oral fluids, because you have to be quite exact about the site within the oral cavity from which you take the sample. And I would remind you that those products, those diagnostic products, which today are approved for home testing are all blood-based products. I am thinking of glucose testing and cholesterol testing, for example. And to answer the second part of your question, there is certainly no sense whatsoever that the FDA would be considering the approval of one product only. All the indications are that they would be favorably looking on approving both oral fluid and blood-based products.

Okay. Final quick question, on the organic growth, I heard that 12% is the target for the year. I am just sort of trying to back out the RDI and Primus effect from '05. It seems like quarter-to-quarter growth was flat to maybe up 1% organically. Is that -- I didn't see that in the release. Do you have that number, the organic growth for this quarter?

On an annualized basis, it's not far off the industry growth rate of about 5% and obviously that's before the impact of the timing on the coagulation orders. So, if you put that back in, it would be back up near where our normal --

Okay. So, 5% organic growth for Q1 without those orders?

Yes, but I think we have reiterated that we are confident of achieving the 12%, which incidentally is what we achieved in 2005. We are confident of achieving 12% again in 2006 and very effectively that -- some of the differences were timing and others were relating clearly to a weak flu season.

Got it. Okay.

We are confident we can make that.

In fact, I would take you back to my -- what Michael, what I said earlier on in my piece, which was particularly about lyme and flu antibodies and the impact they have going forward into Q2, 3, and 4.

Right, and the higher seasonality at this point.

Yes.

Matt Ockner, Columbus Capital Management.

The results would suggest that the -- your United States sales force show some opportunities to ramp up and get up to the speed, is that true and can you talk about what kinds of things you might be doing to accelerate that process?

Matt, certainly, there is always opportunities there for them to perform better and be more efficient and more productive. We are certainly managing and monitoring their performance very closely, have in the recent past made some senior organizational changes there, and if necessary, we will continue to do that going forward, if that's what is required. So, obviously we are very conscious of the fact that having made that investment, we have to make that investment work as good as possible.

Do you have any feel for, I don't know if you can call it a capacity utilization kind of number, but how much further sales could be generated by the current group you've got in place?

To deal with that, Brendan referred to that earlier, I mean clearly, we have a structure in place that can take a significantly greater revenue load, and clearly in seeking acquisitions, we have that in mind. I mean, basically the level at which you -- in order to effectively service the US hospital market, you have to operate at a certain level, at certain -- basically, with a certain density on the ground, we've achieved that. Having achieved that, basically we can put a lot more towards -- I'll characterize it, I think we could probably triple our US turnover with modest increase in personnel. And just to make a further point, I mean we are confident that we have got a top quality sales and marketing team in place in the USA. So, when we talk about changes, we are talking about tinkering.

Okay. All right, that covers it, thank you very much.

[Dennis Hoffer, BETA].

Just two question really. Rory, the first is for you. Could you walk me through the decline in the cash position on the balance sheet from December 31, 2005 to March 31, 2006 from 9,881 to 757? Obviously the restricted cash stayed the same. And also comment on the timing of the convertible note payments and that entry on the balance sheet? And then the second question, I guess for Rory or for whoever it is with respect to the guidance on the operating margin, you guys have obviously commented for a while your goal of achieving 12% operating margins in your business in attaining that industry goal. I heard, I think it was Rory mention the end of this year as the timing of that, and could you maybe just elaborate on that a little bit? Thanks very much.

It sounds like all of those are for me. In terms of the cash movement, there is roughly a 9 million movement from December to March, and that's made up as follows. A 1.8 million convertible debenture payment on the 2nd of January. Also on the 2nd of January, there was 1.3 million repaid to the banks, so now up to 3.1. We paid approximately 3 million to Primus by way of earn-out based on our 2005 performance, and now to six. We paid Fitzgerald 1 million also based on the 2005 performance, so I am now up to just over 7. And then, essentially the difference is working capital movement predominantly in inventory, if you look at the movement of the inventory on the balance sheet. In terms of the convertible timing and what's left, there was a repayment of 1.8 million on the 1st April; that's now gone. And at this point, there are three quarterly repayments left, being one July, one October, and one January of next year, okay? That's 5 --

Why didn't the convertible note entry in December 31st, 2005 of 7203 and then the payment was January 2nd, but --?

You've got, Dennis, you've got 7203 in short term and if you looked at the long-term liabilities, it's 1.8 million, so total of 9 million all the payments. And lastly, in terms of the operating margin guidance, I think you have heard ourselves speak very confidently about achieving the 12% organic growth rate and these are rough numbers now, Dennis, but last year our revenues were just shy of a 100 million. If we achieve the 12% growth rate, it will go to 111, 112 million. And that compares to the quarter one run rate that's about 12 million incremental revenue at approximately 50% gross margin, 5 to 6 million predominantly falling to the bottom line because our indirect costs are largely fixed, and that's where you will find the operating margin increasing in the coming quarters.

[Jeremy Peskoff], Roth Capital Partners.

I was just wondering, with respect to acquisition candidates, most of the deal flow you are seeing, are they negotiated on your behalf or are they investment-banking kind of flow and formal auctions, that kind of thing?

Typically, we would identify acquisition opportunities ourselves. And as a management team, we intend to profits ourselves. But, now and then, we have been [employing] investment bankers there who have acted on our behalf, so it would vary. And [Inaudible] just maybe we take one last question, if there is one?

[Brian Kess, Kettle Hill].

Could you just tell me with your target 12% organic growth rate, how much of that is predicated on new products being introduced this year that have not yet been approved by the FDA and how much of the current products are you selling?

I can deal with that and that is that basically, for products that aren't approved, there is absolutely zero in our budget. It's as simple as that. So, we budget conservatively.

So, all 12% is from products you are already currently selling, correct?

Yes, absolutely.

And then, as far as the Rapid Gel product, if that were to be approved, what do you think that could add maybe this year or next year, how would that ramp up, can you give a little bit color on that, that would great?

Well, I think this year, I mean as I said, we have nothing actually in the budget. I think rather than kind of state numbers, I think that as we understand it, the market at the moment is maybe $120 million really in the US. Yes, I mean it's basically, virtually entirely held by buyers at the moment and Afinion is a product, which was approved for Shield recently in the last couple of months and we expect to be approved within a quarter or two. So, it's got some very significant potential. It is just difficult to -- we are basically loath to actually put a number on that at this moment of time. But, I think it'd be very significant in 2007. But, it'll take some time to ramp up, 2008, it can be more significant.

A quick question here on the SG&A line. When I look at your expenses side, your SG&A number, it jumps around quite a bit, up and down, from low 7.2 million all the way to 9.4 million. What's your reason for that and what can you expect from the SG&A going forward in the next few quarters?

Brian, it's Rory here. It would have hopped around. But, I remember there were two acquisitions in the middle of last year. And so, you can't really compare quarter one and quarter two with the second half of the year. Remember also, last year there was a few items like the transition to the national markets of the Nasdaq, which costs a figure of money. There was also the cost to do with the IFRS conversion work last year, as well as from last year as well. So, there are a few one-offs in there that cause it to jump around a bit. But, that said, if you take the second half of last year and you compare it to the quarter one number, the quarter one number is only up 2.9%, which is pretty consistent over the last nine months.

So, so you see some efficiency going forward on the acquisitions behind you?

We don't -- barring acquisitions, we don't foresee any significant increases in expenditure. There are no headcounts slated during the year, couple of negligible amounts. You should see inflationary type increases during the year.

At this stage, then, I think we will close the call. I'd just like to thank everybody for your interest and your support and we look forward to talking to you next quarter. Thank you and goodbye.

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