Trinity Biotech PLC (TRIB) 2008 Q2 法說會逐字稿

My name is Brooke, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinity Biotech Second Quarter 2008 Earnings Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Mr. Joe Dorame. You may begin your conference.

Good morning, thank you for joining us today to review the financial results for Trinity Biotech for the second quarter ended June 30, 2008. As Brooke indicated, my name is Joe Dorame. I'm with Lytham Partners, and we are the financial relations consulting firm for Trinity Biotech.

With us today on the call representing the Company are Mr. Brendan Farrell, Chief Executive Officer, and Mr. Kevin Tansley, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a Q&A session.

Before we begin, I would like remind everyone this conference call includes statements that constitute forward-looking statements within the meaning 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 effects of regulations by the United States Food and Drug Administration and other agencies; the impact of competitive products; product commercialization; and technological difficulties, and other risks detailed in the Company's periodic reports filed with the Securities and Exchange Commissions. The Company can give no assurance of such forward-looking statements will prove to be correct; we undertake no obligation to affirm publicly, update, or revise any forward-looking statements whether as a result of information, future events, or otherwise.

With that having been said, I'd like to turn the call over to Mr. Brendan Farrell, Chief Executive Officer of Trinity Biotech. Brendan?

Thank you very much. Good day, everybody, and welcome. This is Brendan Farrell speaking. I'd like to start first by asking Kevin Tansley, CFO, to review the results for Quarter 2 and year-to-date. Thank you, Kevin.

Thanks, Brendan. Today I'll take you through a review of the income statements for the quarter; secondly, the key movements in the balance sheet; and the end of 2007, to date.

Starting with our revenue performance. As usual, you will note in the press release an analysis of revenue is broken down by our key product areas -- clinical laboratory, point-of-care and also by geographic location for the quarter.

Looking at the total revenues, you will note that this quarter's revenues are $36.3 million, which represents a 6% increase over Quarter 1 this year. Within this, there was a 21% increase in point-of-care revenues. Our clinical laboratory revenues also increased during the quarter growing by 4.3% from $30.1 million to almost $32.3 million.

Looking at this quarter's revenues compared to the same period last year, we see a decrease of 3%. As can be seen on the table contained in the press release, this is attributable to our point-of-care division and specifically sales of HIV products in Africa. In previous calls we've highlighted the fact that the nature of the African market has and will result in fluctuating sales quarter-on-quarter in this segment.

We'd also point to the fact that Quarter 2 2007 represented a very strong quarter for African HIV sales and hence is not the most representative benchmark. Again, I would point out that HIV sales this quarter represent a 21% increase over last quarter.

From a clinical laboratory perspective, sales this quarter were over 4% higher than the equivalent period last year.

Rather than getting into the detail on the movement by product category and geographic location, I will move on to our gross margin performance trends and will shortly take you through a more detailed analysis of this quarter's revenue.

Our gross margin for the quarter was approximately 45%. This compares to 48% in Quarter 2 2007, however, a more realistic comparison is Quarter 1 of this year when the gross margin was 46%. The lower gross margin this year is largely due to the impact of two factors. First is foreign exchange. Throughout 2008 the dollar has continued to weaken, and this has put pressure on margins. Just to put this in context, and average euro/dollar exchange rate for Quarter 2 this year has been 1.56, and this compares to 1.33 for the same period last year. So, in effect, a depreciation of about 15%.

The second factor is product mix. Point-of-care sales tend to generate higher-growth margins. So far this year, point-of-care sales made up a smaller percentage of revenues than on 2007.

Moving on to our indirect costs -- our R&D costs are slightly ahead of the previous quarter, so just under 5% are consistent of the percentage of revenue. Our selling, general, and administrative expenses, however, have shown a decrease both compared to last quarter and Quarter 2 2007. This quarter, SG&A expenses amounted to $11.8 million, down from $12 million in Quarter 1 this year and down from $12.3 million last year. The principal factor driving this reduction are cost control measures that we have been adopting in recent months.

As the management team, we are acutely aware of the need to continue to contain costs and look for efficiencies where available with a view to achieving our primary objective of improving the profitability of the Company. We are now, I am happy to say, seeing some of the benefits of the restructuring program that we began to implement towards the end of 2007.

Also, this decrease has been achieved in the face of the adverse foreign exchange movement I have already alluded to.

I would also like to point out that I do expect a certain degree of upward movement in this caption in the next two quarters, principally due to the timing of certain marketing expenditure. For example, the largest trade shows for diagnostic companies in the U.S. and in Europe both take place in the second half of the year, and these events are taken very seriously by us, and we have a strong presence in each of them.

Regarding our net financial costs, you will notice these have declined since last quarter, and this is largely attributable to falling U.S. interest rates. I will return to the topic of the Company's debt later on in this presentation.

At this stage, I would like to mention the tax charge. This quarter's effective tax rate is 16%, at higher than in previous quarters. For example, the raise in Quarter 1 this year was 6%. I've pointed out in previous calls that you should expect tax raise to fluctuate quarter-on-quarter depending on factors such as the jurisdiction in which profits arise and also depending on the location of the inventory within the group at any one time.

In some respects the best way to look at the tax rate is to look at the year-to-date picture, as this moves as some of the quarterly fluctuations. On this basis, the effective rate year-to-date of 12%, a little close to the level, which one should expect, which would be around 15%.

Our operating profit for the quarter amounts to $2.3 million compared to $1.8 million in the previous quarter and so this represents an increase of close to 30%. Similar increases being with regard to profit after tax where we have seen an increase from $1 million to $1.5 million -- in this case, an increase of 43%.

Before concluding on our income statement, I would like to point out that our EBITDA and option share expense for the quarter was $4.6 million, which together with Quarter 1 brings the total for 2008 to $8.6 million.

Now let's talk about our balance sheet starting with our property, plants, and equipment. Movement since the beginning of 2008, largely explained by a combination of additions of $1.6 million as offset by depreciation of $2.2 million. The most significant element of condition so far this year has been instruments placed with customers, and these can be expected to generate income over the next three to five years.

Our goodwill and intangible assets have increased by $2.7 million since the beginning of the year, and this is mainly attributable to additions of $4.8 million during the year on development projects. In this context, the principal project continues to be Destiny MAX. Brendan will be providing more details later in the call as to the progress of this project and the other projects that are ongoing at present.

These additions are partially offset by the amortization charge for the year of $1.8 million, which has been recognized in the profit & loss account.

Moving on to inventory next -- inventory has fallen by over $2 million for the year-to-date. This is part of the concerted efforts to reduce the working capital level in the company. In addition, however, we have also been benefiting from running down certain bioMerieux inventory that we had accumulated to cover us during the transition of manufacturing from the bioMerieux plant in Durham to our own facility in Bray.

I would like to point out that while we'll continue to look at ways to reduce inventory levels further, we will see upward pressure as we gear up for full production of Destiny MAX later this year.

Our trade and other receivables balance comprised of the trade receivables from customers and prepayments. Since the year-end, we have seen an increase in trade and other receivables, however, since the end of Quarter 1, the level of receivables has remained level notwithstanding the 6% increase in revenue.

Finally, on the balance sheet, I would like to address cash and our bank debt position. Cash balance at the end of the quarter was $6.2 million. This represents an increase over the $3 million, which was in hand at the end of Quarter 1. Obviously, the equity raised of approximately $7 million during the quarter was a large factor in this increase, and part of the proceeds from this equity raise were used to make the final payments arising as the bioMerieux acquisition. The most significant element of these payments was the $2.8 million deferred consideration payment, which was made June of this year.

At this stage, all payments have now been paid to bioMerieux, and the Company has no liability to bioMerieux or any other party of this nature. Consequently, the other financial liabilities, which appear in the balance sheet, are now stated as zero.

I would also like to point out that at this stage we are investing significantly in our several projects and, in particular, Destiny MAX, as I mentioned earlier. We are reaching -- or have reached, the most cash-intensive phase as we approach launch date.

From a debt perspective, I would also like to draw your attention to (inaudible). As most of you are aware, our debt is made up of three elements -- $7 million revolver facility, which is renewed annually; a five-year term loan of $29 million; and financial leases, which approximate $2 million. The payment profile of the term loan, which is the most significant element, a debt of $29 million, is as follows -- $1.1 million in early Quarter 3 2008. That has actually already been paid. Next -- $2.1 million in early 2009; then every six months thereafter, $3.2 million, and that brings us up to 2012.

So in terms of the interest-bearing debt, less than one year -- that is made up of $1.1 million, which is due in early Quarter 3, so this debt has already been paid; a payment of $2.1 million in early 2009; plus the $7 million revolver which, as I say, is reviewed on an annual basis.

I'll now hand back to Brendan, who will give you more information on this quarter's sales and an update on our development of other activity.

Thank you, Kevin. As Kevin has indicated, I'd like to provide you with a brief update on the business and then take you into the Q&A session.

Let's start off with research and development. As you know, the key program for Trinity Biotech today is the development of the Destiny MAX hemostasis analyzer, which is our high throughput instrument platform targeted at the large hospital segments of the hemostasis market.

Just to remind you, the hemostasis market is a $1 billion market growing at about 7% per annum, and large hospitals represent 50% of this market.

With our existing Destiny Plus platforms, which has a throughput of around 100 patient samples per hour, we are able to address the small and medium-sized hospital segment. Today we do not have an instrument, which is suitable for the $500 million large hospital segment, and this is why we made the decision three years ago to develop the Destiny MAX instrument.

The instrument has now completed its formal development phase and is currently undergoing extensive validation testing. Clinical trials will commence next month in three laboratories -- one in the United States, one in Canada, and one here in Europe.

Our sales and marketing people have increased selling the instrument, and customers have been visiting the Bray, Ireland, site to see the instrument in operation. The feedback has been very positive, and customers have noticed some key competitive advantages of our platform, which is capable of processing more than 300 patient samples per hour.

This would be the only hemostasis instrument on the market other than our own Destiny Plus, which is capable of processing patient samples in both mechanical and optical mode. It also enjoys other significant advantages over our competitors, and we are extremely excited about what we see as a winning product for Trinity Biotech.

The other R&D program, which has been a major focus for us over the past number of quarters is the development of the point-of-care hemoglobin A1 system called Tri-Stat. As you know, Tri-Stat received FDA approval in 2007, and to meet the needs of the U.S. market will also require a CLIA waiver from the FDA. The FDA has requested that we generate some additional data to add to the information, which we have already provided to them.

We are in the process right now of generating that data and, in addition, are taking the opportunity, at the same time, to enhance the product at the request of two of our potential distributors. These products are taking the opportunity (technical difficulty) and we expect them and CLIA waiver to be completed in time for us to launch toward the end of this year or early next year.

With the incidence of diabetes increasing very rapidly on a worldwide basis, for example, in the United States the incidence has gone from 21 million people to 24 million people affected. We believe that Tri-Stat can be a significant growth driver for Trinity in 2009 and beyond.

If we turn away from research and development now to sales for the first half of 2008, I'd like to provide you with a brief review of our revenues on a product line basis. Starting first with out clin lab division. Our [primus] business, which is hemoglobin A1c and hemoglobin variant grew 17% in the first half of '08 over the same period in '07. We expect this business to continue to grow in double digits for the remainder of 2008 and on into 2009.

Turning to our infectious disease product line, we had a 7% growth in sales in H1 of '08 versus H1 '07. This is the current level of growth we expect from our infectious disease portfolio. However, as a key strategic imperative for Trinity Biotech, we are looking for a new technology platform on which to hang our infectious disease product line. We believe that we have now found such a platform, which is a new and very exciting technology and, right at this minute, we are in the process of negotiating a term sheet, which will lead to an agreement and an exclusive license to that technology in the areas of infectious diseases and autoimmune diseases.

If we look at our hemostasis business for the first half of 2008, we see that the business was flat when compared to the same period last year. This is in line with our expectations for the business in 2008, as the older MDA instruments, which we acquired as a result of the bioMerieux acquisition are retired from the market. And, again, to reiterate, we are absolutely on track to launch the Destiny MAX analyzer in Europe in the fourth quarter of 2008, which, as I speak, is just over two months away and, obviously, that Destiny MAX analyzer will replace the MDA placements, which are currently in the market.

At the same time as the European launch, we have filed for FDA clearance in the United States and would expect to be launching in late Q1 and Q2 of 2009 in the U.S. market. Launch of the Destiny MAX analyzer will then have the impact of accelerating growth in our hemostasis product line in 2009 and beyond.

In the context of our hemostasis business, we are very excited with the distribution agreement, which we signed with Akers Biosciences on June 26th for the ADI Heparin allergy test. This rapid test for Heparin-induced thrombocytopenia, or HIT, will address a significant and growing market.

In 2006, for example, over 3.5 million lab tests were performed to confirm HIT, and this number should increase significantly with the availability of a rapid test.

And, finally, in my review of the clinical lab business, I'd like to point out that Fitzgerald Industries, our raw materials supply unit grew 13% in the first half of '08 versus '07.

Let's turn now to our point-of-care division and specifically to our HIV business. Starting first with the non-U.S. HIV business -- which, as you have heard, had a significantly slower start in 2008 than in 2007. Now, as you heard from Kevin, 2007 was a very strong year for HIV sales in sub-Sahara in Africa.

Our sales for the first half of 2008 are down 60% over the same period in '07, but I'd like to emphasize a couple of points about that. Again, just to stress that 2007, for the first half, was a very exceptional period for HIV business in sub-Sahara in Africa. And, secondly, we've carried out a thorough investigation of the market and there is no significant structural changes nor have we lost significant business to competitors. It's merely a question of the timing of the spending of money and whether that money is spent on diagnostic versus, for example, anti-retrovirus drugs.

And in that context, we are extremely encouraged to see that Congress has passed a revolution providing for $50 billion in funding for the renewed PEPFAR program versus the $15 billion that was available the first five years of President Bush's program. That, more than threefold increase in funding, is going to lead to a very significant increase in the diagnostic testing being performed for HIV, both in sub-Sahara in Africa and, indeed, in other countries around the world.

Turning to the U.S. market for HIV testing, numbers here are very encouraging. In H1 of 2008, we are up 26% over the same period last year and starting to make inroads into the share held by the number-one player in the HIV rapid test market in the U.S. That number-one player is having some significant problems with false positivity in their test, which is leading customers to take a long, hard look at their product and we're beginning to see customers switching away from the market leader to Trinity.

This switch is also encouraged by the recent scientific publication in the Journal of Clinical Microbiology, which looked at four rapid HIV tests currently FDA-approved and available on the U.S. market. This study concluded that Trinity Biotech's Uni-Gold HIV test was the most sensitive of the four. This is very significant, and the significance being that a highly sensitive test like Trinity's Uni-Gold will lead to earlier detection of HIV in patients and therefore will help to curtail the spread of the disease and lead to earlier initiation of therapy.

In this context, I would like to mention that the underlying technology, which allows Trinity's Uni-Gold HIV test to be so sensitive is intellectual property just patented by Trinity and will make it extremely difficult for any of our competitors to come to the market with a test as sensitive as ours.

In concluding my remarks, I'd just like to mention to you that Trinity Biotech is exhibiting next week at the American Association of Clinical Chemistry meeting in Washington, D.C., and we have a range of products on display. I'd particularly draw your attention to the fact that the new Destiny MAX hemostasis analyzer and the TRIstat hemoglobin A1c system will both be on our booth, and if you get the chance to visit the show, be sure to stop by, and we'd be delighted to show the systems to you.

With that, I'll hand you back to Joe.

Brooke, could you please prepare everyone for Q&A?

Yes. (Operator Instructions) Matt Dolan, Roth Capital.

First, on the point-of-care business, could you help us break out what Africa was versus the U.S.?

I certainly could, Matt. If you're looking at the first half of the year, U.S. HIV was just in around the $3 million in revenue, and Africa was over $4 million in revenue.

Okay, great. And then going forward you've got a competitive scenario here in the U.S. You've got some nice clinical data. What are you expecting in terms of U.S. as a segment of that business for the second half of the year?

Well, we would expect to see our sales continuing to increase at the pace that they have been increasing, Matt. I think that's the best way that I'd like to phrase it. I certainly wouldn't try to put an exact number on it, but I think you're going to see it, you know, as I mentioned, we increased 26% over the same period last year. I think you're going to see that rate of increase remain the same for the rest of the year.

Okay. On the R&D side, first, with Destiny MAX and the launch coming here potentially in the near future, what's your ability to manufacture? What's your capacity at this stage, and how many of those can you produce, assuming demand?

Well, we have already -- we are already producing instruments. I mean, we have a number of instruments here in Bray that we're using for testing. We already have the instruments produced already that are going to the clinical trial sites, and we are perfectly capable of producing what we believe will be the demand for the instrument over the next five years. So capacity is not an issue for us in relation to Destiny MAX.

Okay. And then on TRIstat, can you define what the enhancements are, and is there any chance that these might require an additional regulatory cycle for that product?

No, they won't require an additional regulatory cycle, but the enhancements focus mainly around the software and also around the shelf life of the product. They are not major enhancements as such; they are, literally, enhancements.

Okay. And then, finally, on the last call you mentioned, or you provided some commentary on your expectations for the year relative to where the consensus stood. Could you provide us with any update on your thoughts here now that we're a few more months into the year?

I think I would reiterate that we're comfortable, Matt, with your numbers for the year overall.

Killian Murphy, Goodbody Stockbrokers.

I'm just inquiring about the state of the Incidence Assay. I was wondering, could you give us an update report on that, please?

Yes. That product, as you know, has completed its research and development program, and we're getting ready for the launch phase. But as we mentioned previously, this is not a high-volume product because this is not a routine test procedure. This is more used for epidemiological purposes, and the sales level of that, when it's fully out there in the market, you could expect it to be somewhere around -- an additional revenue of around $1 million to $1.5 million per annum.

(Operator Instructions) Mark Healy, Davy Stockbrokers.

Just a couple of questions. The first is on the cash generation. I'm just wondering if you can give us any indication of last quarter's cash generation or burn and, secondly, just on the Uni-Gold HIV product -- or, more generally, the point-of-care division, in general -- how soon do you expect to see an uptick or benefit from new funding and that's with Bush coming through on that one?

Hi, Mark. This is Brendan here, I'll take the second part of that question first. I mentioned that Congress has passed a resolution, but that resolution has to be actually signed by President Bush before it's enacted, and then the monies won't flow until you get into the relevant fiscal year, which is fiscal '09 or fiscal '10, I believe, of the United States, which is next year. So you won't see those monies flowing for about 12 months from now.

Mark, I'll just take the second part, then, just in relationship to the cash turn for the quarter. You know, the opening balance was about $3.1 million, and we've closed at about $6.2 million. So the net inflow has been about $3.1 million. As I mentioned during the call there, most of the equity raise was a significant part of that, and about 6.6. So of the $3 million or so difference there, you are seeing that the retainment set by bioMerieux was a significant factor. So take out the equity raise, take out the bioMerieux payment, you're probably seeing this reasonably cash neutral this quarter, which is not altogether unexpected, because, as I pointed out in the call, we are now at the cash-intensive phase in relation to our development projects, particularly debt impacts. We're cash-neutral this quarter.

Okay, great, thanks a lot. And just, finally, on the SG&A front, I've seen improvement this quarter in terms of costs. Do you expect that to continue or do you see it kind of continuing on? Because originally, in your last call, you had said you were expecting kind of a run rate of about $12.5 million per quarter. Do you think that will go back up to that level?

I do. It's going to be around the $12.5 million. We've had two very good quarters with $12 million and (technical difficulty). Last year, as you know, I think we were averaging around the $12.5 million. So I do believe, there's a certain marketing expenditure coming up in the second half of the year, and so the payment is timing-wise. So I see us being around the $12.5 million (inaudible).

Neal Goldman, Goldman Capital Management.

Two quick questions -- one, in terms of the cash and the balance of the year, do you expect to be cash flow neutral at this point, you know, assuming the earnings estimates that you're giving out and the heavy investment still in Destiny MAX?

From a cash flow point of view, I would imagine, by the end of the year, our projections are showing probably having in and around $6 million to $7 million towards the end of the year. So, on that basis, cash neutral to slightly positive.

Okay. The other comment -- Brendan, you made a comment about you have sufficient capacity based on your assumptions for Destiny MAX, going forward. What -- if that's a $0.5 billion market, over time, what do you believe is your opportunity in terms of market penetration?

Oh, that's a tough question, Neal, and I'm not sure that I would want to give out a number over the call that I'd hang my hat on, going forward, over five years. Put it this way -- we currently have an 8% share of the market, and are only competing in half of the $1 billion market. So if you take our opportunity as being around the 8% to 10%, and if you take roughly that there are 1,000 large instruments per year placed worldwide, then you'd expect us to be facing (technical difficulty) overall share. So the number is somewhere around that and, I suppose, to add the missing number from that is the instrument placement is one thing, but what's the reagent flow through from an instrument placement. We would estimate it to be around $40,000 to $50,000 per year per instrument.

And the price per instrument?

Well, the price per instrument is somewhere around the $80,000 to $90,000 but, as you know, in this market, it's more a placement market, a reagent rental market, than it is a selling market. But we'd be happy to take checks as well.

[Bob Eye], [Morlonex] U.S.

I might have missed it when you had the beginning the call -- what is the organic growth rate for the clinical laboratory business? It will be great if you can give an organic growth rate versus -- as well as this business segment?

Okay, Bob, we're having a little bit of difficulty hearing you, but you're asking about organic growth, and I gave it for the clinical chemistry segment as being at 17% in the first half. If you're comparing it just -- state the comparison in H1 '08 over '07 -- 17% or as the (inaudible) variance in the clinical chemistry business; 7% for infectious disease; and flat hemostasis, and the reason being that we're seeing retirement of the older instruments in the hemostasis as we wait to get the Destiny MAX out.

In the case of HIV in the United States with 26% organic growth, and in the case of HIV outside the U.S. with 60% decline. Does that answer the question, Bob?

Yes, thank you.

(Operator Instructions) Matt Reiner, Adirondack Funds.

Going back to the cash flow, can you give me a little bit more color on how you -- the number you're saying by the end of the year expect to be -- it sounds like, roughly, similar to where you are now. I'm assuming that includes the debt paydown, and you also indicated that you were going to have a ramp up in inventories because of the Destiny MAX launch, so where do you see some of that cash coming from as far as getting to that even to slightly positive number for the rest of the year?

I'll take that as best I can -- we're starting at $6.2 million at the start of the second half. EBITDA turns will probably come in around $10 million between now and the end of the year. We will have debt repayments in and around -- if you include interest -- would have around $1.5 million. These payments (inaudible) $2 million. We have CapEx then of in and around $6 million and other payments then probably of a further $1 million, mainly tax. And that should bring us in and around close to the $7 million.

So what I'm saying there is that we'll be, as I say, slightly cash positive when we get to the $7 million by the end of the year, and that will be funded out of acquisition and -- activities, rather -- operations, and within all that, yet, we are funding our debt repayment, which has been made already for this half and all the capital expenditure between now and the end of the year.

Okay. So there's no additional equity raise planned on that?

Nothing of that nature planned whatsoever, no.

(Operator Instructions) There are no further questions at this time, Mr. Farrell. Do you have any closing remarks?

Yes. Thank you, Brooke. I'd just like to thank everybody for participating in Trinity Biotech's Quarter 2 earnings call, and I look forward to talking to each of you individually over the coming days. Thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.