Trinity Biotech PLC (TRIB) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Trinity Biotech Third Quarter Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I'd now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead, sir.

Thank you, and thank all of you for joining us today to review the financial results of Trinity Biotech for the third quarter of calendar year 2017, which ended September 30, 2017.

With us on the call representing the company are Ronan O'Caoimh, Chief Executive Officer; and Kevin Tansley, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session.

Before we begin with the prepared remarks, we submit for the record the following statement: Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify those forward-looking statements.

Investors are cautioned that such forward-looking statements involve risks and uncertainties including, but not limited to, the results of research and development efforts; the effect of regulation by the United States Food and Drug Administration and other agencies; the impact of competitive products; product development, commercialization and technological difficulties; and other risks detailed in the company's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect management's analysis only as of today. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements.

With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer, for a review of the results. After Kevin's remarks, we will hear from Ronan O'Caoimh on his review of the quarter. After which, we'll open the call for your questions. Kevin?

Thank you very much, Joe. I will now take you through the financial results for quarter 3 2017, beginning with our revenues. Total revenues for the quarter were $25.6 million, which compares to $26.1 million in quarter 3 of 2016. And given that Ronan will be providing more details on revenues later in the call, I will now move on and disclose the rest of the income statement. Our gross margin this quarter was 43%, and this compares to 44.7% for the same quarter last year. Two main factors are driving this reduction. Firstly, as you will have seen from the table in the press release, point-of-care revenues are lower this quarter. And given these revenues have a higher margin than average, this has adversely affected this quarter's number.

Secondly, we are continuing to see the impact from the strength of the U.S. dollar and distributor pricing, a factor which we would have mentioned previously. However, I will point out that gross margins have now improved for each of the last 3 quarters, rising from 40% in quarter 4 2016 to 42% in quarter 1 this year to 42.5% in quarter 2 and now 43% this quarter. In fact, this quarter's number is getting very close to the average of 43.2% achieved in 2016 as a whole.

Moving on to our indirect costs. Our R&D expenses were just under $1.5 million, which is a little higher than the $1.3 million reported last year. Similarly, our SG&A expenses have increased to $7.8 million this quarter. As you will have seen from our release, this net increase is due to normal inflationary pressures as well as higher discretionary sales and marketing expenses. It should be noted that quarter 3 traditionally tends to be the quarter with the highest sales and marketing expenditure given the concentration of trade shows and other marketing activities. Operating profit for the quarter was $1.5 million compared to $2.7 million in quarter 3 2016. This reduction is due to the combined impact of the lower revenues and gross margins and the higher indirect costs, which I've just mentioned.

Moving on to our financing cost, which includes the impact of the company's exchangeable notes. Our financial income for the quarter was $212,000, which was identical to the same quarter last year. Meanwhile, financial expenses for the quarter were just under $1.2 million, and again, in line with quarter 3 2016. As you will be aware, the vast majority of this relates to the cash interest due on our exchangeable notes which are on that $1.15 million per quarter.

Meanwhile, the noncash financial expense, which has been separately disclosed further down the income statement, was just under $100,000 this quarter. Again, this relates entirely to our exchangeable notes and consists of a noncash interest charge of approximately $200,000, partially offset by a reduction in the fair value of the derivatives embedded in these notes. This compares to a noncash financial expense of $2.1 million in quarter 3 2016.

Tax charge for the quarter was $56,000, and this represents a nominal effective rate of 9.8%.

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is our profit after tax for the quarter of $445,000. However, excluding noncash items, which is a better measure performance, the profit for the quarter was over $500,000. And this equates to an EPS of $0.024. Meanwhile, fully diluted EPS was $0.063 and this compares with $0.097 in quarter 3 last year. Earnings before interest, tax, depreciation, amortization and share option expense for the quarter amounted to $3.1 million.

I will now move on and talk about the significant balance sheet movement since the end of June. Property, plant and equipment have increased by $700,000, this was due to additions of $1.2 million being offset by depreciation of $500,000. In the same period, our intangible assets increased by $1.7 million, and this was made up of $2.6 million of additions offset by amortization charges of $900,000.

Moving on to inventories. You will see that these have decreased by approximately 3% to $32.7 million. This follows a similar increase in quarter 2 in advance of the peak Lyme season.

Meanwhile, trade and other receivables have decreased marginally from $24.6 million to -- rather to $24.6 million from $24.9 million in June, reflecting strong cash collections from customers again this quarter.

Meanwhile, our trade and other payables, including both current and noncurrent, have increased marginally from $23.2 million to $23.5 million.

Moving on next to our cash flows for the quarter. Cash generated from operations this quarter was just under $3.7 million. Changes in working capital yielded a further $300,000, mainly due to the improved inventory and accounts receivable positions I mentioned earlier. Capital expenditure for the quarter was $3.7 million, which is a significant reduction from the $5.6 million in quarter 3 last year, and this is obviously due to the elimination of Meritas-related expenditure.

The other major cash movement in the quarter was share repurchases of $1.5 million and once-off payments of approximately $0.25 million associated with the closure of our Swedish facility.

So this quarter, before the impact of share buybacks and once-off costs, we generated positive cash flows of close to $350,000. You'll recall that this is the second quarter in a row with positive free cash flows, which is obviously a good sign. However, I will caution that the positive free cash flows to date have been relatively modest and can be significantly influenced by the normal working capital fluctuations that happen from quarter-to-quarter.

In terms of our total cash, the balance at the end of September was $62.5 million. This represents a reduction from $64 million at the end of June. And as you can see, this is entirely attributable to $1.5 million that we spent in share repurchases.

Before handing back to Ronan, I would like to reiterate some of the positives this quarter. From a revenue point of view, Ronan will shortly disclose the underlying growth in our clinical laboratory revenues. In addition, we've seen continued improvements in our gross margins as well as much improved cash flows, to the extent, in the last 2 quarters, we have demonstrated positive free cash flows. Our indirect costs have been relatively constant, and we now have a financial structure that can take advantage of any future revenue growth. I will now hand over to Ronan.

Thanks, Kevin, and I'm going to review our revenue for quarter 3 before opening the call to a question-and-answer session. Our revenues for quarter 3 were $25.6 million compared with $26.1 million in the corresponding quarter last year, which is a reduction of 2%. Point-of-care revenues were at $4.6 million compared with $4.9 million in the corresponding quarter, which is a decrease of 6%. Clinical laboratory revenues were $21 million compared with $21.2 million in the corresponding quarter last year, which is a decrease of 1% or $200,000. The impact during the quarter of the cull of our MicroTrak and Bartels infectious disease products amounted to $800,000. Absent this factor, our clinical laboratory business demonstrated an organic growth of $600,000 during the quarter or 2.6% when compared with the corresponding quarter.

Moving back to Point-of-Care. Our revenues decreased this quarter by 6% when compared with the corresponding quarter. Our U.S. HIV revenues decreased 14%, and this is explained by the fact that public health spending in the United States on HIV testing continues to decrease.

Our competitors in the U.S. market appear to be experiencing even greater decreases in HIV sales into the public health market. Our U.S. HIV revenues constitute approximately 20% to 25% of our total HIV revenues.

Moving on to Africa. Our HIV sales decreased by 4% when compared with the corresponding quarter. However, we do not believe that either the market or indeed our market share have diminished. We believe that this movement is consistent with the haphazard nature of NGO purchasing. Indeed, our African HIV revenues for the 9 months year-to-date are 8% greater than the corresponding revenues of last year.

Moving on to clinical laboratory. I indicated that our revenues have reduced by $200,000 during the quarter when compared with the corresponding quarter last year. This is entirely explained by the impact of the cull of our MicroTrak and Bartels products, which had an impact of $800,000 during the quarter. Absent this factor, clinical laboratory revenues increased $600,000 or 2.8% when compared to the prior year.

Moving on to infectious disease. Our revenues declined 16% during the quarter when compared with the prior year revenues. 12% of the 16% reduction arises due to the cull of the MicroTrak and Bartels product lines, with 4% of the reduction arising from the balance of the infectious disease business. Our U.S. Lyme Western Blot revenues were level with the prior year, while our Chinese infectious disease business performed strongly. However, the gradual decline of our U.S. ELISA infectious disease business continues as our -- as the 5 biggest diagnostics companies continue to add more and more of our products on to the menu of their huge immunoassay systems. However, we believe that we can contain this decline to approximately 3% or 4% annually.

Meanwhile, our diabetes and hemoglobin variant business performed strongly during the quarter, with revenues increasing 9% when compared with the corresponding quarter. We had strong instrument placements in the U.S., China and Europe, with total placement of 85 instruments compared with 78 instruments in the corresponding quarter. The exception was Brazil, where we made no placements during the quarter, principally as a consequence of the weakness of the Brazilian real. However, we have now identified and taken a lease on a modest size manufacturing unit in the outer suburbs of São Paulo and are well advanced in the kitting out and equipping of this unit. And we will commence manufacturing within 6 months. This will give rise to significant savings in duty and also in sales tax as a significant savings in freight, given that Premier and Premier resolution are very heavy users of wet reagents, particularly of wash solution. Given the cost savings that arise as well as the freight duty and sales tax savings and in addition given the natural currency hedge that is created, we will recommence the placement of Premier and Premier resolution instruments into the Brazilian market in quarter 2 of 2018.

Moving finally on to autoimmunity. This business performed well during the quarter with a 7% revenue increase. We have consistently grown this business since its acquisition and believe that it would be a real growth engine for the company. The reference laboratory business has been the best performing part of the business, with significant growth from Sjögren's test and from the growth of our business with the 2 U.S. mega labs.

However, the greatest potential for our autoimmune business is on the product revenue side. And in particular, we believe, that our immunofluorescence product range is the best in class. During the quarter, we achieved a significant breakthrough when we commenced the supply of our immunofluorescence product range to the biggest laboratory group in China.

And I'll now open the call to question-and-answer session, please.

(Operator Instructions) Today's first question comes from Larry Solow of CJS.

Just a couple of quick follow-ups. Ronan, I know in the last couple of calls, you have sort of spoken about sort of your targets as we look out into '18 of getting back to a high single, even low double-digit sales growth. And do you still see that? Is that still something you -- is that a realistic target? And I know one of the laggers there was sort of a rebound in HIV or some return to growth in HIV with going into frontline in Africa. Can you give us an update on where you stand with that?

Sure. Yes. We do believe -- we still believe that we can achieve just about double-digit growth in 2018. And some of the reasons would be, firstly, the launch of the Trin-Screen HIV products. So just to remind you, at the moment, we have virtually all of the confirmatory business in the African market. But we have never really participated in the screening market, which in volume terms is 10 -- 8 to 10 times higher. So we've developed a new product, and we're about to launch that. We need to get WHO approval of the product. But we think in the latter part of 2018, that we'd enter that market. And it's an excellent product. We have a super reputation in the market. And we can manufacture it at a really, really competitive price in our automated new facility here in Dublin.

So we're very optimistic about what we could do with that product, and we think it can be a real growth engine for us. But there's many other factors involved in terms of how we can increase our growth rate. Obviously, we're going to be initiating -- implementing our annual pricing increases. We have -- we're bringing the Premier product back into Brazil, as I mentioned, because, remember, over the past year, we placed nothing in Brazil. We have the Premier resolution, which has been launched and which is gathering momentum right across the world. And of course, then we have our rapid diabetes product, which is the TRIstat, which we don't speak a lot about but which has just recently been launched and which is gathering momentum. We have -- and moving on to autoimmunity, we have immunofluorescence, where we said -- which we are -- which we believe is best in class, and we've just broken into the biggest laboratory group in China. And that alone has very significant potential. Our Sjögren's product is continuing to develop momentum. And then we have our -- we are getting finally our -- the approval on the last of our ELISA products in autoimmunity. In particular, we bolstered our HEp-2000 product, which is pending FDA approval on that. That, I think, is a very significant product that could do really well. So all of those factors and it was also the fact that currency headwinds appear to be turning into tailwinds. I think that will help us as well because we've been greatly disadvantaged in many markets from Canada through Colombia, Turkey and many other instances and, indeed, Brazil with such a strong dollar. So a gradual -- a reversal of that is a great help to us. So I think all of those factors, I believe, can give us that double-digit growth, Larry, that we talked about.

Obviously, a lot of moving parts and a lot of products. I just a couple of questions on sort of the bigger ones, including the HIV, which is my leading question. Have you already filed with the WHO for approval? Because I think normally that takes like 9 to 12 months. So I assume if you expect approval in the back half of next year, does that mean you've already completed the filing? Or...

No, we haven't actually completed the filing. But it wasn't -- it's not actually as long a process as that. I mean, I think we'd be talking about 3 or 4 months.

Okay. How about Premier? Obviously, it's been sort of flat at the 350 placement. But over time, that should draw higher reagent -- say, higher-margin, higher-reagent sales. And are you seeing the reagent sales and utilization improve? And when might we start seeing that as a reflection in your gross margins and whatnot?

Well, I mean, I think that -- we placed 85 instruments this quarter. We're placing about 350 instruments a year. But remember they're all new instruments. So we're not ever [writing] in existing instruments. So that in itself is very, very significant. I mean, it constitutes probably in the order of 25% of all the instruments placed in the world in the last quarter for diabetes. So that alone can drive very significant growth. And as I put it, say, we've got, whatever, 10% or 11% growth -- let's say 9% or 10% growth in the past quarter. And so I think the only thing that's not happening for us -- well, there's 2 big things that haven't been happening for us, I suppose. We haven't been placing in Brazil, and I outlined how that would recommence in quarter 2 of next year. And the second thing is, is that the Chinese volumes, the reagent volumes in China are disappointing, but they are improving. So basically, if we could generate more GP, general practitioner, awareness of the reimbursement programs that are available. And so we're involved in the land grab with our competitors in sort of trying to take their instruments in the hospitals throughout China. So -- but really, I mean, I think our Premier business is performing really, really well. And I mean, placing 300 instruments per annum, constituting somewhere between 20%, 25% of worldwide placements, is a very strong performance.

And there's more if it continues to grow double digits on a global basis, is that industrious?

I mean, as it has been doing, yes, right.

And just in terms of Brazil, obviously, the pullout of the [Holten] sales there, I guess, in the beginning of '16, I think that was, obviously, was an impact. As you reenter that country or begin to manufacture there and reenter into the commercial sales, is there pent-up demand? Is there still demand there? Who's been instilling that demand? Have the others come back in or taken back some shares? You guys have been out for a while there. What sort of -- any color on the outlook there would be great.

Yes. I think -- from memory, I think we placed 121 instruments there in '15. And then we basically had to withdraw from the market. Now I don't think we'll ever place that many instruments again because that market is of some limited size. But I do think that 50 to 60 instruments annually is an achievable target.

Okay. And just last question on the cost side. And I assume, obviously, if you reach your targeted revenue growth, even if you get somewhere in that mid to high single-digit growth, which I think people would be happy to see, what about margins? I was a little surprised to see that your costs actually went up this quarter in the face of hopefully a little bit of decline on the Fiomi side. So how should we think about like underlying expenses? And hopefully, there'll be some operating margin improvement accompanied by sales growth.

Yes. I mean, I think there's 2 significant things that are going to help our cost of sales and increase our gross margin during 2018. And they will be, firstly, that we will commence the manufacturing of our HIV test in the automated factory in Dublin. And that's going to give rise to an increase in our gross margin. And the second thing is that we're just -- in terms of the Premier products, we're making some technical changes with the gel we use in our columns and which will give rise also just, I think, to an improvement in the gross margin. I think that those 2 factors kick in, in 2018 and will -- I think will improve the gross margin.

And our next question comes from Nick Jansen of Raymond James.

Two questions from me. First just on Lyme disease, just wanted to kind of get a better sense of what's going on in that market right now. I did see one of your competitors get a Lyme disease product approved recently. And I don't think it's kind of a head-to-head, but I think there might be some confusion in the marketplace about their positioning versus yours. So maybe just help us better understand kind of your Lyme potential in the short to medium term.

Yes. I think you're referring to the Quidel test. Just be aware, that's a screening test rather than a confirmatory test. We -- our test, basically, is the monopoly player in the confirmatory side. So anything which would come up with a positive on that Quidel test will then -- you would expect to be confirmed using our test, as it will be the case with all screening test. So it's not a direct competitor of ours at all, different part of the market.

And does it help expand your market opportunity if we're now more actively screening for the disease?

More active screening for the disease was -- I'm not sure the introduction of a new product per se would result in the increased screening. It's the number of presumptive positives which are to drive the number of tests that we do, and that will be influenced by the prevalence of Lyme, so weather conditions, et cetera, the expansion of the Lyme condition and obviously awareness and what have you. So the fact that more tests are coming out maybe will contribute to increased awareness and people more likely to look out for the symptoms of Lyme, et cetera. But it's difficult to estimate what sort of direct correlation there'd be in that regard.

And then bigger picture, more strategically with your stock kind of sitting here near 52-week lows, you are showing -- albeit moderate, but you are showing progress on organic revenue growth and gross margins over the last couple quarters. Kind of how do we think about your use of capital going forward? I know you -- in the press release, you're talking more about buyback, but I do think you're somewhat constrained there on the amount you can do at any given quarter plus you're not fully free cash flow positive. So just wanted to kind of get your thoughts on capital allocation, just strategically how you can perhaps either reaccelerate growth from inorganic means or pursue other avenues just to create shareholder value.

Yes. I mean, as it stands at this moment in time, we've got $63 million in cash. We are probably burning at the current revenue rates all-in about $5 million a year. And we are committed at these prices to buying back stock. And at the kind of price level we're at, we're doubly committed. The reality, though, is that the actual value of the stock that we bought back in the last quarter was disappointing. And really that arises, in fact, that our volumes are really, really low at the moment. So the -- and for example, at this momentum in time, we are only really able to buy about 7,000 shares a day, which we've been doing. So we need to get our hands on blocks. I mean, just in the past couple of months, we were unsuccessful in getting our hands on blocks. But we've redoubled our efforts there. And of course, over the past 3 weeks, we've been out of the market, although there's I think -- although a plan has been in place. So we -- so I think the best use of our capital given our current share price would be to buy back stock, and we're committed to doing that.

(Operator Instructions) Our next question today comes from Jim Sidoti with Sidoti & Company.

So we had 2 pretty significant hurricanes during the quarter here in the U.S. Any impact from that on any of your business?

No, none.

Okay. And then the Abbott and Alere deal has closed during the quarter. Are you seeing any changes in the way they're engaged in some of the markets where you compete with them?

No. I mean, we've seen nothing yet. But it's literally only a few weeks. But no, we've seen absolutely nothing yet. Except for -- actually, except for availability of some people basically that Abbott moved on the day they closed. So there have been a couple -- just some people available, some good people.

Okay. Well, right, that's -- so no more questions. So I think, at this stage, we'll close the call. Thank you very much for your interest and your support, and we'll talk soon. Good afternoon.

And thank you, sir. Today's conference has now concluded. I want to thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.