Trinity Biotech PLC (TRIB) 2007 Q1 法說會逐字稿

Greetings, 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. If anyone should require operator assistance (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. Sir, you may begin.

Thank you. Good morning and welcome to the Trinity Biotech quarter one 2007 conference call. I'm joined by Rory Nealon, our Chief Financial Officer, who will bring you through the results for the quarter, and by Brendan Farrell, our President, who will bring you through a review of revenue performance for the quarter. I'll update you on the bioMerieaux coagulation acquisition before opening the call to question-and-answer session.

Before we progress, however, I'm required to read from the Safe Harbor provision as follows. Forward-looking statements in this release are made pursuant to the Safe Harbor provisions 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 effective 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.

So I'll hand you over to Rory now.

Thank you, Ronan. Starting as usual with our revenue performance. As normal, you will note in the press release and analysis of revenues by key product area and also by geographic location for the quarter. In particular you will note that our sales for the quarter have increased by 49% on the same period last year and by 10% quarter on quarter. Obviously the 49% is in part due to the acquisition of bioMerieaux in June last year; what is more relevant, in fact, is the 10% increase quarter on quarter, which is particularly strong when you consider that quarter 1 is normally a slow quarter for Trinity, especially when you have a slow flu season, as has been the case for the industry this year.

Rather than dwell on the revenues and (inaudible), I'll move on to our gross margin performance and Brendan will shortly take you through a more detailed analysis of the revenues.

At the gross margin line, you'll note our margins were up 47.4% for the quarter and are in fact marginally better than both we and TheStreet expected. You'll recall on previous conference calls that we have alluded to the downward pressure in margins brought about by the bioMerieaux acquisition, namely the greater mix of instruments there such would ensue, and the transition costs which would be with us during 2006 and 2007.

This has come through to some extent, albeit with the success (inaudible) and keeping the transition costs to a minimum. And as a result, our gross margins are better than was expected. Going forward, there are three particular growth drivers for our gross margins that you should be thinking of.

Firstly, there is the China effect. On a number of occasions now you've heard our plan is to move the manufacturing of our Uni-Gold HIV product for the African market to China. This project is very much on track and will be completed in the current quarter. Suffice to say, we will be making the product quite a bit cheaper than is currently the case, and will have a positive impact on our gross margins going into Q3 and beyond.

The second growth driver you should watch out for is the ongoing growth in our Uni-Gold HIV sales into the USA. As you know, we make 80% less margins on these sales and as the volume of those sales continue to grow, it will have a positive impact on the overall group gross margin. Finally, the [current] growth driver is the impact of the bioMerieaux acquisition. As just mentioned, the bioMerieaux deal itself is having an impact on our gross margins for two reasons.

Firstly the general nature of the hemostasis business, which is inherently a lower margin business, and secondly the impact over recent and coming quarters of the production transfer from Durham, where bioMerieaux produced their reagents to Trinity Center of hemostasis excellence in Ireland. You'll recall that this is a process which commenced early in Q3 last year and will continue until late this year or early 2008. During this period we've been incurring and will continue to incur various costs associated with the likes of recruitment, the training of our personnel in Durham, and various validation studies before we commence true profitable production. This is understandably having a downward impact on the margins during the recent quarters.

Obviously as these activities come to a conclusion towards the end of this year, we would expect to see our margins increasing; hence the last of the three growth drivers in margins I've been referring to.

Moving on to our administrative expenses, the key statistic to point out is that our SG&A costs as a percentage of revenues are reduced from 37.4% in Q1 last year to 32.7% in the current quarter. At an absolute dollar level, our SG&A costs are also slightly less than last quarter due to the various once-off items last quarter such as -- and you'll recall we mentioned these on the last call -- the opening of the French office, the opening of the UK warehouse and some bioMerieaux transition costs.

Going forward, costs should be somewhat similar to the current quarter, perhaps slightly higher than moved through the year with various (inaudible) costs. That said, we should still be the range of analyst expectations of 48 to $49 million.

Moving on to our next financial costs, as expected, our interest income and interest expense have decreased quarter on quarter. Our last prepayment of the convertible debt was on the second of January and accordingly that interest coupon is now gone. Similarly in January we paid $4.1 million of bank debt as we do every six months and our interest payable to the banks is reduced accordingly.

At the taxation line with a small tax credit this quarter largely down through a quirk in the accounting rules related to Company stock profit and intercompany sales. We've been reorganizing how we do business around the group and repositioning inventory in the Trinity distribution centers rather than in our factories. And our distribution centers typically are in high tax jurisdictions as compared to our biggest factory, which is in the low tax jurisdiction.

I won't go into too much detail, but in any event, when you reverse the intercompany stock profit you reverse the tax at a higher rate, thereby creating a tax credit. (inaudible) is not the easiest thing to understand, so if anybody has any queries on the topic maybe give me a call after this conference call.

Moving on to the balance sheet just to talk about that, and starting with our property plant and equipment. The movement is a combination of additions of $500,000 during the quarter as offset by depreciation of $1,040,000. So for those of you who calculated the depreciation plus the amortization plus our operating profit, you get EBITDA of about $5.5 million. Coming back to the property plant and equipment, obviously we would expect the run rate on additions quarter on quarter to increase as we move forward and we kit out our new factory here in Ireland for the bioMerieaux deal.

Our good will and intangible assets line has similarly moved through a combination of amortization and various additions associated with development projects. The next item on our balance sheet just to touch on is the inventory line, which is what we're dwelling on for a minute. Inventory has increased by $3.5 million during the quarter, which again is largely down to the recent bioMerieaux acquisition, and bioMerieaux, as you know have been building 18 months worth of inventory for us over a twelve-month period and as such inventory has been climbing.

This transition agreement with bioMerieaux will finish at the end of June, at which times our inventory should have peaked, and obviously thereafter we would expect our inventory to start reducing back to more normal levels. Our trade and other receivables balance is comprised of both trade receivables from customers and prepayments. On the trade receivables side of things we reduced the debtor days from 76 to 67 during the quarter, largely due to the timing of customers' orders and also due to a successful cash collection campaign.

Prepayments meanwhile have been increasing as one would expect due to the various advance payments we have been making for equipment for the new factory and those will obviously convert into fixed asset additions as the factory goes live. And Ronan will touch on that topic later on.

On the cash side of things, our cash is reduced from $18.3 million at the end of last year to $13.5 million at the end of March, largely down to the debt and interest repayment of approximately $5 million.

So just to conclude on the financials, it's worth noting that our performance and pretty much all line items either meets or exceed market expectations. And lastly just to say we're particularly pleased with our EPS performance, which is very strong at $0.15. Brendan.

Thanks for Rory. Before providing you with an update on our marketing and sales activities, I'd like to remind you that we have a publicly stated goal to achieve overall organic growth year on year of greater than 10% per annum. In effect, this means that we want to drive organic growth in our business at twice the growth rate of the diagnostics market overall.

You'll have noted that our clinical chemistry business grew 3% in quarter one of 2007 versus the same quarter in prior year. We now have completed the reorganization of our clinical chemistry marketing and sales groups. Our US-based sales and marketing group now focuses exclusively on the US domestic market and the international group here in Ireland handles the rest of the world.

We continued to progress with the FDA the approval of our point of care hemoglobin A1C test, which is the Tri-Stat product. We expect approval in quarter three of this year. We remain hugely positive about the prospects for our Tri-Stat product, which would be a major growth driver of our clinical chemistry business going forward.

Moving out to hemostasis business. This product group represented 44% of our revenues in quarter one this year, and hence is our largest single business unit. Due to the acquisition of the bioMerieaux hemostasis line in June of 2006, the overall growth of this business was 138% when you compare quarter one of '07 over the same period last year.

The cornerstone of our hemostasis marketing strategy is the expansion of our instrumentation product offering. We currently service small and midsize hospitals with our Destiny platforms. Our new Destiny Max instruments will cover the largest hospital segment of the hemostasis market. Progress on our Destiny Max development is excellent. The instrument was already shown to end-users at the Medica Trade Fair in Dusseldorf, Germany in quarter four of last year, and we will be showing the instrument for the first time in the USA at the American Association of Clinical Chemistry meeting in San Diego, California in July of this year.

The Destiny Max project is the single largest research and development project ever undertaken by Trinity Biotech, and we're very excited that this instrument and the rest of our Destiny range will help us achieve our growth targets for our hemostasis business units.

Moving to the infectious disease area, our revenues declined 2% over the prior period of 2006. Once again quarter one was a light season for respiratory illness and this is a pattern which we've now seen for at least three consecutive years. Nonetheless, we remain very confident that this product group will produce double-digit organic growth in 2007.

Finally, to talk about our point of care business, which is essentially our rapid HIV products. The 70% increase in revenues in quarter one of '07 over the same period last year represents excellent organic growth for this business unit, which continues to be our single largest growth driver. The recent agreement which we made with the partnership for supply chain management under the [Petfile] program has already begun to yield orders. And we're confident that this program and another number of other similar programs will drive strong organic growth in our African HIV business in 2007 and beyond.

In the US market we continue to take marketshare from our competitors both in the hospital and the public health arena. Regarding the HIV OTC opportunity, we continue to progress our efforts in relation to seeking approval from the FDA for home use for our Uni-Gold HIV product. This approval will certainly not be in 2007 but we do expect it to happen in 2008. We are cautiously optimistic about the prospects in this new HIV test market segment, and are still undertaking market research to quantify this opportunity.

From a geographic standpoint, we now have our own direct sales forces in the USA, Germany, France and the UK, and accordingly we cover well over 65% of the world diagnostic market with our own salespeople. The bioMerieaux acquisition has made these sales forces more productive and will allow us to demonstrate continued improvement in our operating profit throughout 2007. Ronan?

I'm picking up about what Brendan was saying there on the bioMerieaux acquisition. Just to deal with some of the detail, the integrations as he said has proceeded successively. From a sales and marketing perspective we have successfully transitioned the bioMerieaux customer base into Trinity customers in the US and the UK and Germany and France through our own salesforce and throughout the rest of the world, through either existing Trinity distributors or in a smaller number of cases, through our new distributors. This has all been accomplished with minimal loss of customers or instruments.

The new manufacturing unit being built in Dublin will be completed in the next eight weeks. We expect to manufacture our first batch of bioMerieaux product in quarter three as planned. The transfer of instrument manufacturing results are progressing well in line with plan. Instrument placements are gaining momentum and the last piece in the puzzle is that the launch of the new Destiny Max instrument for use in larger hospitals is keeping exactly to schedule, as previously outlined by Brendan.

So, following that I'd like if I could hand over to (inaudible) for a question-and-answer session, please.

(OPERATOR INSTRUCTIONS) Matt Dolan, Roth Capital.

Just nice quarter, first of all. Second, on the point of care business, can you help us maybe just dissect that out -- much higher than expected, obviously, than our number. Any impact -- did you feel any impact in Q1 either from the African contract that we saw or the US contract? And secondly, from those contracts, were there any bulk orders in Q1 that would make Q1 in excess of what the rest of the year might play out to be?

Hi Matt, Brendan here. I think Q1 was exceptionally good for HIV. There were just timing of orders that came in. One or two that we might have expected not to arrive until quarter two of this year actually came in, in quarter one. So it was an exceptionally good quarter. And you shouldn't necessarily expect to see the same level of sales in the subsequent quarters, but having said that, we do expect to get a good double-digit growth in our African HIV sales and indeed higher growth in our US HIV sales throughout 2007.

Okay, great. And then secondly, Rory, I think you may have touched on this. I've been bouncing around so I apologize. Can you just go over the revenue and operating profit impact of deferred revenues in the quarter coming out of the 1.7 in Q4?

Yes, that was 1.7 of profit which was deferred and during the quarter we would have collected $500,000 in revenues, so that $500,000 and the associated profit associated with that has been booked in the Q1 numbers, but only that amount. The rest willed be booked as and when the cash comes in over the coming quarters.

What's your confidence level on your expectations to capture the rest of that?

We still expect it to come in, Matt. It's just a question of how quickly. A bit difficult to be specific about it, so we're not going to get too specific or give expectations. But as and when it comes in, it will get booked to the accounts.

Finally on the A1 seafront, it looks like we're looking at Q3 of '07. Can you just maybe go over the rationale in a little more detail for the delay at this point and what some of the final hurdles might be? Thanks.

Brendan again here, Matt. I guess really the delay came about because we made a modification to the instrument to make it more competitive and to do something that the market leader, which is Bayer, wasn't able to do and that is to perform three tests simultaneously. And having modified the instrumentation was a view of the FDA that we had to go back and seek approval for that modified instrument which we hadn't expected to be the case.

So that was the essence of the delay but we've done the trials necessary, we've submitted the information and that's why we're pretty confident now that we'll have approval in Q3 of this year.

On the Cleo waiver side of that, any concerns around efficacy thresholds and are you pretty well in line with FDA expectations? It's more just a modification?

It's more of a modification and I'm following from the approval of that modified instrument comes a Cleo waiver, but we're very confident. It's a very simple device to use and we don't see any barriers at all to either approval or waiver.

Waiver hopefully within Q3 as well?

Yes. When I say Q3 launch I mean both FDA and Cleo waiver.

Ian Hunter, Goodbody Stockbrokers.

First of all, just maybe on the margins. I see there's a very good margin recovery this quarter over the last and actually over the last three or four quarters. And I just wondering can we expect this to continue through the coming quarters? And could you give us a gate on what you think the operating margin is going to be over that quarter? I know you have given us the SG&A but I noted the R&D costs ticked down a bit this quarter, and do you think it's going to be at this level or will it start to tick up again?

Just to break it out into its components, Ian -- good afternoon to you -- to break it out into components, the gross margin is fairly comparable to last quarter at 47.4 from memory. Within that then the SG&A did come back a little bit, so obviously that helps the operating profit line to some extent. But the real driver of the operating profit line -- and it's always the case with Trinity -- is the extent of delivery on the sales number.

Our indirect costs are pretty much fixed. Obviously if we do an acquisition somewhere along the way it tends to change them, but other than that our indirect costs are reasonably stable. And the gross margin don't hop around that much, so what really drives our operating margin is the extent to which the sales numbers come through. If you go back to Q4, you'll see that it's $33.3 million versus $36.7 million.

The (inaudible) an extra $3.4 million of revenues or about $1.7 million of gross margin coming through and feeding down into the operating profit line. So that's all will sort of drive our operating margin performance is going to be scale and the delivery, okay. The extended delivery on the revenue line.

Thank so much for that. You've given us some indication of the (inaudible) the A1C product and also the Uni-Gold rapid HIV. I was just wondering if you can give us some update on the Lymes disease [alyzer] test and the Western blot confirmatory test.

Hi, Ian, it's Brendan here. In relation to the Lyme [alyzer], that's finalizing its trial in a reference lab in Southampton in the UK. And we expect that product to be on the market for the Lyme season which really kicks in, I would say start to kick in next month. So that's really almost through with the R&D process at this stage and would almost come off the R&D list in the next month or so.

The HIV Western blot has a little bit of a delay due to supply of a critical raw material. We're starting trials next month. We'll submit to the FDA in quarter four and we're hoping that they'll fast-track the approval because there's only one player on the market in the USA which is Bio-Rad. So that updates you on both of those projects.

Jack Gorman with Davy.

Well done on the quarter. Three questions, please. Firstly, on point of care. Brendan, I think you talked through the very strong performance in that division. Given the way margins moved year on year, is it fair to assume that the bulge in revenue is more African driven rather than US?

That is correct. Yes. It is certainly African driven and as you know, the flow of orders in Africa is highly unpredictable, whereas it's much more predictable in the US. So you do get a lumpiness about the business in Africa as you wouldn't see in the US.

Perfect, thanks, Brendan. Second question just on the hemostasis division. I noticed obviously very strong year on year growth. I noticed a small reduction in Q on Q. I'm just wondering should we read anything into that? Are there any seasonal factors involved?

No, there's certainly no seasonal factors involved in hemostasis. And there's no significance at all in this lower revenue at quarter on quarter. Just timing of orders.

Perfect. Finally just, you mentioned also, Brendan, the Destiny Max. Can you just (inaudible) remind us what the timeline is on that. And then secondly, if he can just give us a sense of the market opportunity? You mentioned it will be a focus very much on the large hospitals market. Like what kind of percentage of the overall market is that? Just to give us a flavor for it.

Okay, in terms of its timing, we would expect -- we already have produced a number of Destiny Max instruments that are at beta sites for trialing. But we would expect the initial launch of that to be late Q4 here in Europe and probably late Q1 of 2008 in the United States, depending on when FDA approval would come through.

In terms -- and I'm not sure that I can be too exact or scientific on these numbers, but when you're talking about the large hospital segment, you're obviously talking about fewer hospitals but you're talking about very high-volume patient throughput and therefore patient sample throughput. So I would estimate that the large hospital segment would account probably for at least 50% of the overall market if not slightly higher. So in other words when you place a large instrument, you're going to churn through a lot more reagents and plastic consumables than you would in the placement of a medium or small size instrument.

Brendan, would you from your own knowledge of the space, given the kind of dynamics there, is that a much more competitive segment of the overall hemostasis market?

No, it's not necessarily. And just to remind you, and I know you know this, that it is a -- the competitive profile of hemostasis is quite low in that there are only four players really of substance in the market, which would be [Dade Stagel], IL and Trinity Biotech; Trinity having a 13% share. So the competitive profile is quite low and it's not a very highly competitive segment of the diagnostic market overall.

(OPERATOR INSTRUCTIONS) Michael Feldman, Triathlon Capital.

Great quarter, everyone. A couple of real quick questions. On the US HIV market, I'm curious to sort of get some color on what's changed there. It sounds like the ability to take share from the competitors is increased. I'm wondering if the market perception, just you guys being out there for longer there's more of a willingness to go with the Uni-Gold, if it's -- what, if anything, has changed from the kind of customer standpoint in your view of the Uni-Gold test?

I guess a couple of things have changed. One is that because one of our competitors having their product purchased by the CDC under a bulk purchase program, a lot of the customers in the public health arena were essentially given free product by the CDC. And therefore they simply got the product that was given to them and may have been unaware that there was a competitive product available. Our sales force has done a super job out there. And it's certainly making all the customers and potential customers aware that there are alternatives, and that the alternative product, the Uni-Gold product, being the product that it is, gives more accurate results in a shorter period of time and has a longer shelf life than our main competitor. And that's a compelling argument in terms of the customers and that's why you're seeing conversion away from our competitor and to Trinity Biotech.

What would you estimate your share is at this point in the US market?

I'd estimate our share in the hospital segment -- I'd have to divide it up -- our share in the hospital segment is probably about 30% at this stage. Our share in the public health arena right now would probably be about 15% or so.

There's still lot of room to grow some share gains in both those markets?

Well, there's a lot of room to grow from share gain but there's also a lot of room to grow from increased funding coming in through a variety of sources into the market. So the market is going to grow and there's plenty of room for our share to grow as well.

And is there any update on that fund? I mean I know the CDC recommendations to have broad testing or are we just sort of -- is that a long wait now in terms of what funded would end up happening there?

It's a question really of the CDC have made the recommendation but funding has to become available. I think there's a little bit of political football being played between the Democrats and Republicans about the funding. And it's a question of whether the CDC would themselves out of their own funds be able to fund some of those programs. But I mean the message is getting through that these are the new guidelines and so you will see increased testing as a result of that.

One final question, sort of broad question on hemostasis on the bioMerieaux integration. From the customer standpoint, would you say that that's done now? I mean has -- do people know their new wraps? Are they happy with the billing and all of that kind of administrative stuff gotten settled down and any --

You're absolutely right. It has. I mean, customers are very grateful that Trinity Biotech is around because when a company like bioMerieaux is testing one of their businesses, obviously they don't have a very tight focus on it. And so the customers might have felt a little bit neglected under bioMerieaux in the latter days of their ownership of that business. But now they're very pleased to see us around and we are administering the contract that have been in place with those customers. We have visited them a number of times and in the various markets in which we are operating with the bioMerieaux business, and it's gone -- it's not without its glitches, but it has gone very, very smoothly. Better than we would expected.

Thanks and congratulations again.

Gentlemen, there are no further questions at this time. I would like to turn it back over to Mr. O'Caoimh for closing comments.

Thank you very much indeed. Then thank you to everybody for your participation and your interest and your support. And we'll talk to you again next quarter. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.