Trinity Biotech plc (NASDAQ:TRIB) Q2 2022 Earnings Call Transcript

Trinity Biotech plc (NASDAQ:TRIB) Q2 2022 Earnings Call Transcript November 5, 2022

Operator: Good day, and welcome to the Trinity Biotech Second Quarter Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz from Lytham Partners. Please go ahead.

Joe Diaz: Thank you, Kay, and thanks to all of you for joining us today to review the financial results of Trinity Biotech for the second quarter of 2022, which ended June 30, 2022. Joining us on today’s call are Aris Kekedjian, Chief Executive Officer; and John Gillard, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Before we begin, I must inform you that statements made in this conference call may be deemed forward-looking statements within the meaning of federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

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

Aris Kekedjian: Thank you, and good morning, everyone. I’m very pleased to be here today as the new Chairman and CEO of Trinity Biotech. As many of you know, I’ve been involved with the Trinity team since May when I joined the Board of the company. During that time, I was closely working with John and the team to develop and refine a new business plan and was drawn to the upside potential of the platform as the proactive healthcare environment continues to evolve as a mega theme. From a macro perspective, Trinity is experienced in developing and marketing world-class point-of-care rapid tests to WHO standards, and its highly regarded 50-state certified reference lab in the United States are critical assets that can be effectively positioned to take advantage of this theme.

I think partnerships, channel relationships and industry consolidation will play a big part in servicing digital and decentralization healthcare trend. Another key theme that I was considering was the fact that pharmaceutical industry is very focused on the autoimmune space, spending millions on therapeutics and customer education. Testing is the key to the evolution of this complex space. This is a right area of opportunity for us to leverage through partnerships as well. Diabetes is a fast-growing problem in developing markets where we have deep relationships and distribution networks. Combined with the right product strategy, there’s room to grow significantly. In this context, Trinity’s following attributes appealed to me. First, I was impressed with the recent leadership hires that had joined the company.

They are experienced healthcare executives in many cases or executives from other large multinational companies who are looking to apply their skills in an entrepreneurial capacity. In addition, one of the things I did realize was that the Trinity workforce is really highly capable and eager to align itself to a clear mission. The second attribute that appealed to me was the fact that I was attracted to the point-of-care, lab and autoimmune platform possibilities. I think — I also think at the same time, there’s untapped potential with our Fitzgerald Life Science business. I’ve recently become more clear in my thinking about the profitability potential of the hemoglobin business as well. The third attribute that appealed to me was the fact that personally I like working with businesses that have global scale and distribution capabilities.

It fits my profile well, and I think Trinity has the ability to take advantage of that because I think globalization offers opportunities to scale growth and profitability. Fourth, my assessment continues to be that Trinity Biotech is significantly undervalued and trades well below its intrinsic value to the sum of its parts. And then finally, the NASDAQ listing provides a platform for industry consolidation and a path for our ecosystem partners to gain access to that liquidity. It is also a strong tool to attract talent, especially at current valuation levels. In essence, Trinity is a 30-year-old business with a serious brand, has the ability to operate effectively in a regulated industry, is small enough to be nimble and has the public vehicle to enable partnerships, industry consolidation, value creation for our shareholders and wealth creation for the Trinity Biotech team.

My experience in working closely with the portfolio of GE Healthcare businesses and other regulated platforms open my eyes to the fact that in this industry, operational and regulatory excellence is a competitive advantage that comes with long-term superior returns. Just a few thoughts about my priorities for the next 3 to 6 months. I think they’re quite straightforward, to be honest. First, the focus is to establish a clear vision and strategy that aims at scaling our core businesses, namely, I want to position our point-of-care platform and lab services capability to enable the decentralized testing disruption that is being led by digital health, other payer sponsored programs and new market entrants. Scaling our autoimmune platform through partnerships and product development are also a priority and maximizing profitability in our hemoglobins business is key.

I also would like to leverage our Fitzgerald brand and figure out how to maximize it and its capabilities, both in terms of its efficient sales process and its distribution capabilities and its breadth of offerings to find further growth capabilities. The second priority is to build a performance culture and drive ownership and accountability. This starts at the top with a focus on operating rigor, clear execution goals and shareholder alignment. program will be at the core of this transformation and will be modeled after my compensation plan. Shareholder value creation and the Trinity team’s wealth creation are perfectly aligned. Third, our renewed focus on inorganic growth through partnerships and M&A will be a priority. This is how we scale.

We have a public currency. We intend on using it in an intelligent fashion. Finally, I am pledging a renewed commitment to shareholder communication and to rebuilding credibility with the Street. My intent is to attract institutional investors who get the vision and believe in this team. In exchange, we need to have a clear strategy and deliver on our results. Now I’ll turn it over to John to give you some perspective on the financials for the quarter.

John Gillard: Thank you, Aris. Good morning, everyone. Now I will take you through the results for Q2 2022. Let me begin by warmly welcoming our new CEO and Chairman, Aris. Since Aris joined the Board back in May of this year, I’ve had the pleasure of spending a lot of time with him as we look at the opportunities available to the company and indeed some of the challenges we continue to work through. I very much look forward to partnering with Aris and the rest of the team and continuing to drive Trinity Biotech modernization and transformation for a more dynamic, higher growth and efficient global organization. Before I begin discussing our Q2 ’22 results, I will point out that we have changed certain presentations in our financial statements this quarter.

In previous earnings announcements, we have disclosed one-off accounting charges such as impairment losses in a separate line below profit or loss after tax. Similarly in the past, we have split our financial income and expenses between those items that are cash and noncash, the latter being disclosed below profit or loss after tax. This presentation reflected how management evaluated the performance of the business, although it did not conform to international financial reporting standards. Beginning this quarter, one-off accounting charges will be reported within operating profit and loss in accordance with IFRS. We will no longer disclose noncash financial income and expense separately, and we will show a full cash flow statement rather than abbreviated version.

Moving on to our results for the quarter, starting with revenues. Total revenues for the quarter were $18.5 million compared to $25.8 million in Q2 2021. As Joe pointed out and has been our typical approach, our CEO, Aris, will discuss revenues in further detail on the call. As such, I will now move on to discuss other aspects of the income statement. Gross margin for the quarter was 35.3% compared to 42.7% achieved in quarter 2 2021. Our gross margin remains susceptible to product mix changes, geographic spread, currency fluctuations and product-level variation. As was the case in Q1 this year, the reduction in gross margin this quarter was mainly due to the very strong sales and margins recorded in the comparative period within our COVID-19-related portfolio of products.

In the years since then, demand for our PCR Viral Transport Media has fallen as the level of PCR testing for COVID has declined in North America, and the availability of better supply from other manufacturers has also hampered demand. Moving on to R&D expenditure, which was $1 million in the quarter, down almost $100,000 compared to Q2 2021. We continue to focus on operating efficiency and cost control and have continued to reduce headcount as we pursue greater automation and simplification of processes. Meanwhile, SG&A expenses in the quarter were $6.5 million, down over $100,000 compared to Q2 2021. Here, we are benefiting from the stronger U.S. dollar against the euro, which is reducing our substantial euro-denominated SG&A expenses. And this is a trend we expect we will continue to see in the second half of the year.

Offsetting this has been increase in transaction-related management bonuses and increased travel costs as our sales teams have been focusing on meeting our customers and distributors now that most COVID-related travel restrictions have been lifted. We have recorded an impairment charge of just over $500,000 this quarter compared to a charge of $6.1 million in the corresponding quarter in 2021. Under IFRS, a company is required to carry out periodic impairment reviews in order to determine the appropriate carrying value of its net assets. This period’s review has resulted in a noncash impairment charge of $0.5 million being recognized. A number of factors impacted this calculation, including the company’s share price on June 30, 2022, which was lower than the share price at the time of the prior impairment review being 31 December 2021; cash flow projections for each business unit and net asset values across each of these companies’ individual business units.

The above factors have resulted in an operating loss for Q2 2022 of $1.4 million compared to an operating profit of $200,000 reported in Q2 2021. The main drivers of this reduction in operating profit are the reduction in revenue and margin contribution from our COVID-related portfolio of products along with 0 Paycheck Protection program income being recorded in Q2 2022 compared to $2.9 million of Paycheck Protection program income being recognized in Q2 2021. This was partly offset by a lower impairment charge this quarter. Moving on to net financial expenses of $8.3 million recorded in Q2 2022, which compares to $0.3 million for Q2 2021. This increase of $8 million is mainly due to nonrecurring expenses of approximately $5.6 million associated with the early partial repayment of the Perceptive term loan.

As you may know, we repaid approximately 42% of the term loan principal during the quarter. As a consequence, we incurred a penalty for earlier payment of approximately $3.5 million. And secondly, under IFRS accounting rules, we have accelerated the recognition of the accretion interest expense, and this resulted in an additional noncash expense of $2.1 million this quarter. I will talk further about this early repayment of the loan later on the call. The remainder of the increase in net financial expense is mainly due to higher interest rates applying to our borrowings post refinancing. We replaced exchangeable notes with a coupon rate of 4% with a senior secured term loan with an interest rate of approximately 13%, albeit the net amount now borrowed is substantially lower.

As a result, interest payable increased by $0.9 million compared to Q2 2021. Lastly, we recorded a fair value adjustment on derivative balances related to the term loan, which this quarter was an expense of $400,000. Loss after tax was $9.7 million in Q2 2021 compared to a loss of $0.8 million in Q2 2021. As in prior quarters and as set out in our press release, we quote earnings per ADS effectively are equivalent of EPS. Loss per ADS has increased from $0.037 in Q2 2021 to a loss per ADS of $0.286 in Q2 2022. I will now move on to address some of the main balance sheet movements we have seen since quarter 1 2022. I’m pleased to be able to report that Trinity Biotech has a significantly stronger balance sheet this quarter with total liabilities lower by $21 million compared to the end of March 2022 and lower by $28 million compared to last fiscal year end.

The more significant balance sheet movements during quarter 2 2022 are the $45.2 million investment from the MiCo Group and the part repayment of the term loan. MiCo investment has resulted in $25.2 million of additional equity capital and a new 7-year convertible note of $20 million. This $2 million convertible note is accounted for as a compound financial instrument containing both an equity and liability element. The debt component is accounted for at amortized cost in accordance with IFRS 9. On June 30, 2022, the carrying value of the convertible note debt component was $13.4 million. The equity component of the convertible note is $6.7 million and has been recorded in the equity section of the balance sheet. The carrying value of the term loan has reduced by $32.3 million this quarter, reflecting the early settlement of approximately $35.4 million, partly offset by accretion interest.

The remaining balance sheet movements which I would like to highlight are intangible assets and inventory. Intangible assets increased by $1.4 million. This is made up by additions of $1.6 million, which mainly comprises capitalized R&D expenditure, and this was partly offset by amortization. Inventories have decreased by $0.5 million since the end of Q1 2022. This increase is within the normal range of fluctuation for inventory levels, and that decrease this quarter brings the inventory balance back to a level we reported at the end of December 2021. Finally, I will discuss our cash flow for the quarter. Our cash balance increased by $400,000 to $10.5 million in quarter 2 2022. The aforementioned investment of $45.2 million from the MiCo Group was received during the quarter, was primarily used to fund an early repayment of the term loan of $34.5 million and a related penalty for early repayment of $3.5 million.

Cash from operations was an outflow of $1.9 million. We had capital expenditure cash outflows of $1.8 million and payments for property leases of $0.7 million. Interest payments for the quarter were $2 million. And as you may have seen in our earnings announcement, we have made a cash saving to date of approximately $2.3 million from repaying part of the term loan early. While we are speaking about the term loan, I would also like to bring your attention the fact that the minimum liquidity covenant for the Perceptive loan has been amended until May 2023, so that the unrestricted cash balance that we are required to maintain is now $2 million, down from $5 million previously. I will now hand it back to Aris, who will bring you through the revenue and key business highlights.

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Aris Kekedjian: Thank you, John. Now I would like to discuss a few revenue highlights for the quarter and priorities for the rest of the year. Total revenues for Q2 2022 were $18.5 million. Excluding our COVID-focused PCR Viral Transport Media products, Q2 2022 revenues of $18 million were broadly flat compared to Q2 2021 and were up 7% compared to Q1 2022. A strong year-over-year increase in our diabetes A1c product line revenues of over 25%, offset a decline in legacy infectious disease product demand in Asia due to continuing COVID-19 lockdowns. Preliminary estimates for Q3 are for expected revenues of between $19 million to $20 million, driven by an approximate double-digit year-over-year increase in both our hemoglobins and Fitzgerald Life Science businesses.

Fitzgerald’s revenue momentum into the second half of 2022 continues with a 25% quarter-over-quarter growth as the strategy of focusing on high sales is getting traction. Q3 Global Health HIV orders for Africa, which are often difficult to predict, increased compared to Q2 2022. And we expect our HIV point-of-care revenue to grow over 30% on a quarter-over-quarter basis. Since World Health Organization approval in February of our TrinScreen HIV product, the relevant Kenyan Ministry of Health Task Force recommended TrinScreen as the first-line screening test for Kenya’s new HIV testing algorithm. In addition, the presubmission process has been started in several other African countries. For context, our target countries for TrinScreen HIV active — under active evaluation in 2023 have a combined estimated market size of 30 million tests annually.

We chose Kenya as the first country to submit TrinScreen for inclusion in the national HIV algorithm given its large market size, estimated 5 million to 6 million tests a year, and its prestigious leadership role as an innovator in HIV management in Africa. The use of the new HIV algorithm had been delayed due to the change of government in Kenya following the election in August and a legal objection by competitors regarding the overall HIV algorithm evaluation process. The new government is now in place, and we understand they are motivated to scale up the HIV rapid testing program to pre-COVID-19 levels. We understand the implementation of the new testing algorithm will begin before the end of the year and expect the first orders to arrive shortly.

I would also like to take this moment to welcome Tom Lindsay to our Board of Directors. His experience and networks in Africa will be a significant benefit during this product rollout. In May 2022, the company announced the closing of a $45.2 million investment from MiCo Limited. The investment consists of an equity investment of $25.2 million acquired for $2.25 per ADS and a 7-year unsecured junior convertible note of $20 million with an interest rate of 1.5% and mandatory conversion price of $3.24. As part of its ongoing balance sheet restructuring, the company made an early repayment of the $35 million of its term loan with Perceptive in May. The partial repayment will save the company cash interest expense of $5 million annually. Further refinancing may be optimized in conjunction with the execution of one or more potential strategic transaction opportunities we are contemplating.

Now focusing on our hemoglobins business, our largest platform. We have recently completed a comprehensive 3-year execution plan for the business that incorporates new targeted product launches and intelligent actions to maximize profitability. In late August, the company submitted its 510 (sic) 510(k) submission to the FDA seeking U.S. regulatory approval of its Premier Resolution Haemoglobin Variants instrument. Subject to FDA approval, commercial sales are expected to begin by Q2 2023. The team is also finalizing the development of a lower-cost mid-throughput A1c instrument that leverages the core consumables technology from our existing Premier 9210 instrument. This new instrument is targeted at developing markets where rates of diabetes growth are substantial, but the entry price of instrumentation is a barrier.

We are also developing a commercial strategy that combines equipment financing with our core product offerings, ensuring a favorable cost entry point for our customers while optimizing the Trinity balance sheet. Supply chain, product design, optimization and commercial actions are underway in this business to significantly optimize the margins of the platform. This includes insourcing key elements of our consumable column manufacturing and streamlining our product focus. My expectation is that these actions should deliver a double-digit profile for the business over the next 3 years at well over 50% gross margins. We see significant growth potential in our autoimmune business as well. Our focus is on the 2023 launch of a clinical laboratory reader and processor range to complement our existing consumables products.

We are also in the platform evaluation stage for the adoption and development of a chemiluminescence system aimed at our current ELISA product range. I’m quite focused on our proprietary Sjogren’s dry eye testing capabilities within our autoimmune portfolio and believe we can scale this product line through pharmaceutical partnerships and applications in adjacent markets such as dentistry. In an effort to address demand growth for our cryo slides business, we are expanding manufacturing capacity at our Jamestown facility while also offsetting excess production capacity from the expected runoff in demand from our legacy infectious disease products. We have launched a strategic review of expansion opportunities in the point-of-care space and in the sponsored decentralized consumer testing programs in order to take advantage of the evolving patient expectations, rapid technology convergence, focus of ambitious and well-funded tech and CPG players and payer focus on controlling healthcare costs through proactive digital healthcare.

We are actively exploring acquisition and partnership strategies in these areas aimed at accessing channel distribution, product innovation and user experience expertise. And at the same time, we intend to make a substantial investment toward this effort over the next 18 months in our Buffalo, New York lab, which is well positioned to serve the decentralized testing market because unlike many other U.S. labs, it is certified to process samples from all 50 states. In addition, we are positioning our point-of-care product business and Irish manufacturing operation to apply its operational capacity, product development focus and regulatory know-how as an ecosystem enabler of the disruption in the space being driven by market forces. There may be an opportunity here to leverage our MiCo biomed relationships in relation to their handheld enzymatic product line.

I’d like to use the analogy that we are aiming to be the Shopify of the decentralized testing space. The combination of our world-class lab operation and decentralized testing product development history is unique in the industry. Platform optimization actions to date have resulted in a significantly more efficient workforce. Our average headcount in the 6 months ended June 30, 2022, was approximately 410 compared to over 500 in the 6 months ended June 30, 2021, and we expect total headcount to be under 400 by the end of 2022. Operational efficiencies will continue to be a focus across the board as we aim to make our processes leaner, more agile and highly automated. We are undertaking a portfolio-wide capital and talent allocation review, emphasizing maximization of return on capital and to ensure that our incentive systems are being enhanced to drive significant target improvements in gross margin, earnings, cash contribution as well as revenue growth.

The center base of our incentive system will be an program modeled after my own equity compensation, which results in substantial financial incentives when shareholders benefit the most. Over the past 18 months, the company began a program of leadership upgrades, beginning with our CFO, John Gillard, and subsequently attracted experienced leaders in operations and HR. Most recently, over the last couple of quarters, this focus on talent has expanded to include new leadership in supply chain, regulatory compliance, business intelligence and technology. I urge you to visit our website to see their bios. While we have brought in fresh talent to lead key sales initiatives, this area continues to be a direct focus of mine. Over the coming weeks and months, my intention is to further outline Trinity Biotech strategic focus for 2023 and beyond.

One such opportunity will be the upcoming Piper Sandler Healthcare Conference on Thursday, December 1, where Trinity Biotech is scheduled to present its strategy. That concludes our commentary regarding the quarter. We are now available to take your questions.

Q&A Session

Operator: The first question is from Jim Sidoti of Sidoti & Company.

Jim Sidoti : The first one with regards to the sales of the VTM, the COVID-related products. You said down about $7 million in the quarter. So does that mean those sales are basically gone at this point? And do you expect them to come back?

Aris Kekedjian : Well, let me give you some context, and I’ll have John give you maybe some of the detailed trend lines on this. But look, COVID is a little hard to predict right now in terms of how we’re facing the winter season. Obviously, there’s a fair bit of concern in the U.S., and there’s this whole triple threat with RSV and flu. Last year, I think it — we saw a tick-up. Will we see that again? I don’t know. Frankly, we’re not predicting it. It’s down substantially. We’re not counting on VTM to be a driver of our strategy going forward. John, I don’t know if you want to add anything to that.

John Gillard : Yes, Jim, we’re down about $7 million, as you said, to about $400,000 in quarter 2. And looking up to labor the point continues to be very fluid situation with COVID. We have seen a continued demise of PCR testing in North America. So hard to predict. At this stage, it doesn’t seem like it’s going to be a significant feature for quarter 4.

Jim Sidoti : Okay. And then for the third quarter, I believe, sales a year ago for the VTM was around $3 million. So it sounds like you expect sales to be up about $0.5 million from a year ago if you exclude that. Does that sound about right?

John Gillard : Just give that to me again? Jim, sorry.

Jim Sidoti : For the September quarter in ’21, I believe the sales were about $3 million. So if you come in at the midpoint of your guidance for 2022, I think you’re implying about 3% top line growth excluding the COVID. Does that sound about right?

John Gillard : I think we’ll have about between $300,000 to $400,000 of COVID sales in Q3. And so look, it’s preliminary guidance, but I think it’s probably going to land somewhere in and around what we have in Q2.

Aris Kekedjian : I think, John, the question was our guidance of $19.5 million ex COVID, what’s our — what’s the year-over-year for third quarter? Is that your question?

Jim Sidoti : Yes.

John Gillard : Yes, COVID last year was about $3 million in quarter 3. And this year, we expect it will be between $300,000 and $400,000.

Jim Sidoti : Okay. So if you come in at $19.5 million, you’re up maybe a couple of hundred thousand from 2021 on a year-over-year basis?

John Gillard : Yes, yes. I understand what you’re saying. Yes, I understand what you’re saying.

Jim Sidoti : Okay. How should we think about interest expense for third quarter and going forward? I know this quarter, it was unusually high because of the accelerated paydown.

John Gillard : Yes. So interest on the Perceptive debt is about 14% now. Okay. And there’s about $45 million on that. So that will be our expected cash interest cost. The accretion interest is noncash. And it’s an IFRS driven charge.

Jim Sidoti : Okay. And how should we think of the share count for the third quarter and going forward?

John Gillard : In terms of EPS calcs, it — yes, it will increase somewhat more Jim because, obviously, the shares issued to MiCo will have been outstanding for longer.

Jim Sidoti : Right. So does that sound about right?

John Gillard : In and around that, Jim. In and around that Jim .