Trinity Biotech PLC Q4 FY2020 Earnings Call

Good day, and welcome to the Trinity Biotech Q4 and Fiscal Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Ronan O’Caoimh. Please go ahead.

Thank you very much. Good afternoon here and good morning to everybody in the United States. I’m joined by John Gillard, our Chief Financial Officer, who is firstly going to bring you through the results for the quarter. Then I’m going to give you an outline of progress in sales and marketing and give you a revenue review. Then we’ll open the call to the question-and-answer session. So, if I could ask, John, go ahead, please.

Thanks, Ronan. Good morning, everyone, or afternoon depending on where you are. And thank you for participating in our earnings conference call. Before we begin, I must inform you that the statements made in this earnings call may be deemed forward-looking statements within the meaning of the 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. The risks include but are not limited to those set forth in the Risk Factors section of our annual report on Form 20-F filed with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. Now, I will take you through results for Q4 2020 and then the results for the full year 2020. You will notice from our press release that a non-cash impairment charge has been recognized this quarter, as has been the case in recent years. And this is of course at the end of the income statement commentary in the press release. I will give further details on this later in the call. In addition, earlier in 2020, the Company recognized one-off costs relating to the closure of our Carlsbad, California facility. The income statement metrics I will quote exclude the impact of these two charges. I will begin by outlining the results for Q4 2020 and then I will move on to discuss the results for the whole year, as I mentioned. Starting with revenues, total revenues for the quarter were $32.8 million compared to $21.3 million in Q4 2019. As is our typical approach, Ronan will disclose revenues in further detail later on the call. As such, I will move on to discuss other aspects of the income statement. Gross margin for the quarter was 47.8% compared to 43.5% in Q4 2019, which is a significant improvement. This improvement in margins is largely a result of sales mix changes, including continued strong COVID-19-related revenues, lower levels of instrument placements and the impact of cost-saving initiatives put in place during 2020. Our gross margin remained susceptible to changes in product mix, geographic spread, currency fluctuations, and product-level variation. As such, while the improved margin is welcome, I would caution it is not necessarily a new basis. Other operating income increased from $24,000 in Q4 2019 to $1.9 million in Q4 2020. A $1.9 million income in 2020 mainly relates to funding received under the U.S. government CARES Act, principally its Paycheck Protection Program. Two out of six Paycheck Protection Program loans received by the Company were forgiven during the year. We’re in the process of seeking forgiveness for the remaining four Paycheck Protection Program loans totaling $2.9 million, and we expect them to be forgiven in 2021. These four remaining loans are treated as short-term liabilities at December 31, 2020. Moving on to R&D expenditure. This remained relatively flat compared to quarter four 2019 at $1.3 million. Meanwhile, SG&A has increased by approximately $500,000 to $6.9 million. This increase is primarily driven by increased performance-related pay as a result of the Company’s increased sales and profitability compared to the prior year and foreign exchange charges on the translation of non-U.S. dollar denominated leases. These result in an operating profit of $9.1 million compared to $1.4 million reported in quarter four 2019. Analysis of the $7.6 million increase in operating profit indicates it is primarily driven by increased revenue, which contributed almost $5 million to operating profit with the gross margin improvement of $1.4 million, with PPP loan forgiveness also adding to that increase. Moving on to financial expenses. This includes the quarterly cash interest costs for our exchangeable notes of $1 million and $200,000 related to notional finance charges associated with these facilities. These notional lease finance charges are required by the relevant accounting standard IFRS 16. You will note that there are further non-cash financial expenses of $800,000, which are made up of non-cash accretion in the accounting carrying value of our exchangeable notes and non-cash fair value adjustments to the convertible assets of the note, as required by the relevant accounting standards. Profit after tax before impairments and non-cash financial expense was $8.6 million compared to $1.3 million in quarter four 2019. Tax for the quarter is a credit of $700,000, which is mainly related to the benefit of R&D credits with third quarter operating profit expected to be largely shattered by tax losses and deductions carried forward from prior periods for which no deferred tax asset had been recognized. As in prior periods and set out in the press release, reported earnings per ADR effectively are equivalent to EPS on a standard basis and also before the impact of impairment charges, one-off items, and non-cash financial expenses. In that modified measure, earnings per ADR have increased to $0.41 from $0.061 in Q4 2019, while diluted earnings per ADR have also increased, in this case to $0.359 from $0.09 in Q4 2019. Earnings before interest, tax, depreciation, and share options for quarter four 2020 were $10 million. I will now address the full year results for 2020. Starting with revenues. Total revenues for the year were $102 million, compared with $90 million for the prior year. As already mentioned, Ronan will discuss revenues in further detail later on the call. So, I would again move on to disclose other aspects of the income statement. Gross margin for the year was 47.6%, compared to 42.2% last year, which is a significant improvement. Similar to quarter four, this improvement in margin is largely a result of sales mix changes, including continued strong COVID-19-related revenues, lower net of instrument placement, lower depreciation charges, and the impact of cost savings initiatives put in place during 2020. Again, while the improved margin is welcome, I would caution that it is not necessarily a new basis. Other operating income increased from $0.1 million in 2019 to $1.9 million in 2020. And as I already mentioned, the $1.9 million income in 2020 mainly relates to funding received under the U.S. government CARES Act, primarily its Paycheck Protection Program. Moving on to R&D expenditure. This showed a slight reduction to $5.1 million in 2020 compared to $5.3 million in 2019. SG&A expenses decreased from $26.9 million to $24.2 million, a decrease of 10%. The decrease in SG&A expense was partly due to cost-saving measures which were implemented in response to the COVID-19 pandemic and included the furloughing of some employees, reduced travel costs, cancellation of trade shows and other marketing events. These savings were partially offset by the aforementioned increase in performance-related pay due to higher revenues and profits. Our share option cost remains broadly flat at $780,000. This resulted in an operating profit for 2020 of $20.3 million compared to $5.3 million reported for the full year 2019. The main drivers of the increase in operating profit were increased revenue, increased gross margin, lower SG&A costs, and the forgiveness of the Paycheck Protection Program loan. Moving on to finance cost. This includes the annual cash interest costs of our tangible note of $4 million and $900,000 related to the notional finance charges associated with these facilities, again as required by the relevant accounting standard IFRS 16. Again, you will note that there are further non-cash financial expenses, in this case, $1.9 million for 2020 as a whole, which is made up of non-cash accretion of the accounting value of the exchangeable note and again, non-cash fair value adjustments to convertible assets, required by the relevant accounting standard. Profit after tax before impairments and non-cash financial expense for 2020 was $15.7 million compared to a loss of $4.1 million reported in 2019. Again, in our press release, we quote earnings per ADR on the standard basis and also before the impact of non-cash financial expenses and one-off items. That modified measure, earnings per ADR for 2020 has increased to $0.75 from a loss of $0.194 in 2019. Diluted earnings per ADR have also increased, in this case to $0.749 from a loss of $0.003 in 2019. Earnings before interest tax, depreciation, and share options for 2020 were $24.2 million. As I mentioned previously, the above metrics are before the non-cash impairment charge of $17.8 million and the provision for one-off closure-related costs related to our Carlsbad facility, which were announced earlier in 2020. I want to provide you with more information on that impairment charge now. This charge results from the accounting standard-driven impairment review required to carry out under IFRS, as we have carried out from prior years. There are a number of factors taken into account in calculating the impairments, including the Company’s year-end share price, calculation of the Company’s cost of capital, the net asset value, and future projected cash flows for individual cash-generating units in the business. In addition, the Company examined individual project costs for indicators of impairment. The non-cash impairment has been recognized against the following asset categories, intangible assets of $15.4 million; tangible assets of $1.8 million; and current assets of $600,000. I will now move on to address some of the main balance sheet movements we’ve seen since quarter three 2020. Property, plant, and equipment decreased by $900,000, which is largely the accumulation of the aforementioned impairment charge of $1.8 million and depreciation of $0.5 million, which is offset by capital expenditure additions of $1.4 million. Tangible assets decreased by $14 million which is made up of amortization of $0.2 million, the aforementioned impairment of $15.4 million offset by additions of $1.6 million. Trade and other receivables have increased by $1 million, reflecting the higher sales this quarter. Moving on to inventories, you will see that these have remained broadly flat at $30 million. Meanwhile, our trade and other payables have increased by $4.2 million. This is driven by a number of items, including working capital efforts in the quarter, customized credit terms obtained from suppliers, deferred revenue, accrued performance rate of pay, and partly offset by the Paycheck Protection Program loans forgiven and accrued interest payment in the quarter. Provisions increased by almost $4 million, mainly reflecting outstanding obligations relating to the closure of the Carlsbad facility and other contingent liabilities. Finally, I will discuss our cash flow for the quarter. Cash generated from operations during the quarter was $17.3 million. The Company paid $2 million interest on exchangeable notes. Other major cash flows for the quarter included taxes and other interest of $1.1 million, capital expenditure of $3.6 million, and payments for property leases of $0.7 million. Overall, this resulted in a strong cash balance of $27.3 million at the end of 2020, which is a net increase of $7.4 million in the quarter. I’ll now hand back to Ronan, who will bring you to the revenue.

Thank you, John. I’m going to review our revenues for quarter four and the revenues for the year before opening the call to the question-and-answer session. Revenues for quarter four were $32.8 million compared to $21.3 million in the corresponding quarter last year, which is an increase of 54%. Point-of-care revenues in quarter four were $2.5 million, compared with $2.2 million in the corresponding quarter, which is an increase of 17%. The strong recovery in HIV revenues in Africa has now returned to normalized levels, following two quarters which were adversely impacted by COVID-19. As you know, for many years, Trinity Biotech has been the dominant supplier of HIV confirmatory tests in Africa. We are now entering the screening market for HIV in Africa, which is a 12-fold bigger market by value. We are very pleased to have completed the clinical trials in Africa on this new product despite COVID headwinds over the last few months. We’ll be making the final submission to the World Health Organization within the next two weeks, thereby enabling us to enter the HIV screening market for the first time upon receipt of WHO approval, which we anticipate will occur over the next number of months. Results of the clinical trials were absolutely excellent. Moving on to Clinical Laboratory, our revenues for the quarter increased to $30.2 million from $19.1 million, which represents an increase of 8% compared to the corresponding quarter. This increase is primarily explained by strong COVID-19-related product revenues with our PCR Viral Transport Media product being the most significant contributor. With respect to the current quarter, in quarter one of 2021, we are continuing with our practice of not giving guidance despite being late in the quarter because of the fluid situation with COVID-related products. What we will say is that clearly quarter four was a very strong quarter and we saw many of our customers stockpiling COVID-related products. As a consequence of this and as a consequence also of evidence of slightly lower levels of COVID testing in the market, our revenues in quarter one 2021 will not be as strong as in quarter four 2020. We have developed and continue to develop a strong suite of COVID-related products. Our FDA-approved PCR Viral Transport Media product, called FlexTrans, performed very strongly during the quarter. It’s a sample collection device for COVID-19 PCR molecular testing, which is used to store the nasal pharyngeal swab, which contains the patient sample, allowing it to be transmitted in a stable environment. The transport medium stabilizes the sample and prevents bacterial growth and maintains its integrity until such time as the test is run in the laboratory. The Company has scaled up its manufacturing capabilities of this product to meet strong demand. Meanwhile, we received the CE Mark on our COVID-19 IgG ELISA antibody test during the quarter and are now free to sell the product throughout the European Union in addition to the United States. The product has specificity in excess of 98% and sensitivity in excess of 95% in samples drawn at least 14 days from symptom onset. These percentages comfortably exceed the requirements of the FDA emergency use authorization pathway. The product is manufactured in our facility in Jamestown, New York, and is capable of being run on a wide range of instrumentation platforms, allowing access to virtually every testing laboratory in the world. Moving back to the development of COVID-19 tests, we have previously indicated that the Company is also developing a rapid point-of-care COVID-19 test to detect IgG antibodies using finger prick blood samples with a test running in 12 minutes. Development of this test has now been completed with excellent sensitivity and specificity comfortably within FDA requirements range. The Company is now manufacturing product for final validation in advance of an emergency use authorization submission to the FDA, which we expect to be completed during the current quarter. In addition, the Company is developing a COVID-19 rapid antigen test using a nasal pharyngeal swab, which runs in 12 minutes. The test will be manufactured in our automated manufacturing facility in Ireland, which is virtually identical to that of both HIV Unigold. Meanwhile, the Company has also experienced significant increased revenue from our COVID-19 monoclonal antibodies. These monoclonal antibodies are the key raw material used in the manufacture of COVID-19 antigens. As a consequence of COVID-19, we have experienced revenues from respiratory point-of-care products. And moving back now to our core business. As already indicated, our HIV business has returned to normalized revenue levels. Our diabetes business continued to have low instrument placement during the quarter with just under 30 instruments placed, which is less than 50% of normal placement levels. This is not surprising as hospitals and clinics were unlikely to purchase new capital equipment in the midst of the pandemic. However, we are confident that these segments will fully recover in a post-pandemic environment. Meanwhile, reagent revenues in our diabetes business are running at about 90% of normal, again due to the fact that patients are less likely to perform discretionary tests during the pandemic, while our autoimmune business was approximately 10% short of normal levels due to the fact that many patients are deferring doctor visits except where absolutely necessary. Now to look at the year as a whole. Total revenues for fiscal year 2020 were $102 million, compared with $90.4 million in 2019, which is an increase of 13% year-on-year. Point-of-care revenues decreased from $11.4 million in 2019 to $9.2 million in 2020, which represents a decrease of 19%, driven by lower HIV sales in both the USA and Africa. The decline in the USA is attributable to the decision to exit this market, which has been in decline for a number of years, while African sales were lower due to COVID-related issues arising primarily in the second and third quarters. Clinical Laboratory revenues increased from $79 million in 2019 to $92.8 million in 2020, which represents an increase of 17%. This increase is mainly due to strong sales within our COVID-19-related product portfolio, with our PCR Viral Transport Media product being the most significant contributor to revenue within the portfolio. Due mainly to the impact of COVID-19, revenues for hemoglobin, autoimmune, and infectious disease products all recorded decreases in 2020 compared to 2019. Our hemoglobins business revenues were affected by the deferral of diabetes instrument purchases as healthcare resources were stretched by the pandemic. Our autoimmune business was also impacted by COVID-19, experiencing lower testing volume in our New York reference laboratory. However, we are confident that revenues in these business sectors will entirely recover in the post-pandemic environment. So, if I could now hand over to the operator for a question-and-answer session, please.

Our first question comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Good afternoon, Ronan and John. Sorry, I had to join the call a little late. So, I’m sorry if you went over this already or not. But, last quarter, I think you indicated that the revenue from the COVID-related products was around $13 million. Did you break that out for this quarter?

No, we haven’t actually said we haven’t separated it?

Was it similar to last quarter? Can you give us anything on that?

It’s about exactly the same, Jim.

Okay. Right. And you indicated that you’re getting closer with the TrinScreen WHO approval. Should we assume that you’ll be generating revenue from TrinScreen in 2022?

Yes, absolutely in 2022. Currently, despite the challenges posed by COVID and delays in trials across various countries, we have completed the trial in two to three countries. We anticipate submitting the final module to the FDA in the next three or four days, as everything has been prepared for this. The results of the trial were exceptionally good, exceeding our expectations, indicating that we have a very promising product. Now, we are waiting for the WHO to review it. The timeline for their response in the COVID environment remains uncertain, but we've been in discussions with them recently. They are currently prioritizing certain antigen tests, but we are hopeful for a timely review.

And just in terms of timing, do you have to wait for tenders to start…

If you look across about 30 to 40 countries, algorithms primarily focus on supplier reviews. The screening suppliers are typically reviewed or changed every two years, and sometimes every year, but normally it's every two years. As a result, there is a constant flow of renewals occurring all the time. We’ve been actively going through each one of them.

And COVID’s been…

I think in some larger countries, like Nigeria, there can be 60 million to 70 million tests or even 50 million tests in a year, and the screening can be divided between two companies.

And then the last one from me, COVID’s definitely been a pass on certain products. But then, as you indicated, it’s definitely put some pressure on things like your diabetes sales and some of your other products. Are you seeing that pressure starting to subside in Q1 and do you expect the diabetes business comes back to at least 2019 levels in 2021?

Yes. If you look at diabetes, our instrument placements dropped significantly during April and May, nearly to zero, but started to recover somewhat in the third quarter and more in the fourth quarter. However, even in the fourth quarter, we were still at 50% of normalized placement levels. For reagents, we’ve found it to be about 90% of normal, and we were surprised by how strong that is, considering that people are trying to avoid going to hospitals and doctors. But that's what we've been achieving. We’re confident that the market will fully recover in the post-pandemic environment, once a significant majority of people are vaccinated.

The next question comes from William Lapp, a private investor. Please go ahead.

Good morning or good afternoon to you gentlemen. John, nice to have you on board. I got a few questions. Number one, I presume you did not qualify for the second draw on the PPE loans. You didn’t meet the criteria? Have you applied for the second draw for the PPE loan?

In some of our businesses, we did apply, and I think we did qualify, but not for the others.

Okay. So, you’ve submitted. Have you met the 20% test, but did you...

Yes.

Okay. Have you got the loan yet, or you haven’t got it yet?

Yes, we have. We received two of them…

And how much was that?

$1.7 million.

$1.7 million, which you anticipate to be proved…

Yes. It’s difficult to predict at this stage where it’s going in terms of the forgiveness. The first step is, we receive the fund.

Okay, Ronan, in the third quarter, you made more profit compared to the fourth quarter. You were at $22 million in the third quarter versus the fourth quarter. Can you compare the third quarter of 2020 with the fourth quarter of 2020? Did you make less money in the fourth quarter?

No, we didn't. I suppose the major impact would be an increase in SG&A costs in the fourth quarter, along with a reduction in margin as well. Those are the main contributing factors to that.

Okay. So now... pardon? Did you say something, Ronan?

Yes. No, go ahead.

Yes.

I was just about to say, but… I was going to say that there was strong profitability and strong cash generation, the cash increased from $19 million to $27 million.

Okay. That's good to hear, as we have a significant loan approaching. Could you provide more details regarding the COVID situation? You mentioned this quarter might not perform as well as the fourth quarter. Is your COVID-related work primarily focused on distributing supplies used for swabbing, and how is that progressing? Additionally, how is your laboratory testing, which generates revenue compared to rapid tests? Has that been successful, and what is the current status?

We’re starting with the United States, and now we’re also expanding into the European Union. We see significant potential, especially in rapid tests and point-of-care testing rather than laboratory testing. Our focus includes both rapid antibody tests and the ongoing development of antigen tests. I believe the biggest revenue opportunities will come from point-of-care testing rather than laboratory testing. Additionally, I want to highlight that we are performing very well with monoclonal antibodies.

Could you explain the difference between the two rapid tests? One is an antibody test, right? I was wondering if you have two rapid tests for COVID, and one of them is a blood test.

Yes.

And then, what’s the other one then?

Yes. We have two tests. One is an antibody test that functions similarly to the HIV test. Essentially, you use a spring-loaded device to obtain a drop of blood from a finger prick, then place about 30 microliters of that sample onto the test. After adding four cups of wash solution, you’ll receive results in 12 minutes. This antibody test indicates whether you have previously contracted COVID. The other test we are developing is an antigen test. This test is designed to detect if you currently have COVID at that moment. The antibody test is nearing completion, and we anticipate receiving emergency use authorization from the FDA in the second quarter. Therefore, we expect to have our product on the market within the next three months.

Okay. So, it’s similar to the Alere test and the Abbott tests that are available, right, those other tests?

It’s the same way as Abbott’s test or Quidel’s antigen test. So, we’re working on that. We’re making very good progress, without giving timelines, we just don’t want to tie ourselves to timelines. I would prefer not to overpromise. But the confidence is that we are developing high-quality tests which can be manufactured in high volume in our automated systems of manufacturing facility here in Ireland. We already can manufacture in high volume. We’re confident basically of developing a good test, a very, very good antigen test, and quality tests for the long term.

Well, that sounds good. I mean, there’s quite a market for that. And I mean, that’s what people have to go, like to go to the airport, they have to go to another country, they have to have the test 72 hours before boarding, that test would be performed once for an antigen test, right? Like if you’re going to go from the United States, maybe to Hawaii, you got to have a test before you get on the airplane 72 hours prior. Would that test be used to say you can go, and you are safe, right, an antigen test?

That’s normally a PCR test. The advantage of the antigen test is that it can be done at the point of embarkation. It only takes 12 minutes, so it can be done on the spot. A PCR test, on the other hand, has to be completed 24 to 36 hours before travel.

Okay. So, that's very helpful for the distinction. Given where you are in 2021, what do you anticipate? What do you see as the prospects for where Trinity is really going to excel, without providing any guidance? Where do you expect significant growth?

The most exciting aspect for us right now is our TrinScreen product. We have been a leading player in Africa with HIV testing and screening for 15 years, and we are now entering the much larger screening market with an exceptional product. We believe we can capture a significant share there. In Africa, 117 million of these tests are conducted annually, and we are confident about securing a substantial portion of that market.

That’s quite profitable, and we expect it to remain profitable.

Absolutely, yes. And beyond that, we would be very excited about our COVID range of products, because we think, although as the entire population becomes vaccinated, COVID is not going away. We think we have a suite of products for the long term.

Okay. That’s good. And I presume that you’re focusing heavily on the repayment of that. Is that $100 million due in April of 2022. Is that a target for the loan?

Yes.

Well, thanks for taking my question. And I appreciate the progress you’re making. And keep up the good work.

Thank you so much. Okay. Operator, we’re just going to take a last question and then wrap up the call.

Okay. The last question comes from a private investor. Please go ahead.

Just a quick question on that 4% senior note. I think, the prior caller asked the same question. But he didn’t really let you finish. So, my question is, what are the plans for senior notes? It seems like it’s commonly due in May of 2022?

We have carefully considered our options as a management team and Board, and although that date is still some time away, we will use that time to determine the best approach. While I won't disclose our detailed plans on an open conference call, you may notice that our cash balance has increased from $19 million to $27 million, which is a positive development given the upcoming maturity of that note. I don't want to be evasive, but that's about as much detail as I can provide.

Okay. That’s fair enough. Thank you.

So, we see no more questions. So, if I could just wrap up the call now and say thank you very much for your support and your interest, and look forward to talking to you, actually, in not too many weeks away, because this is a small gap to our quarter one results. So, thank you, and good morning.

Thank you, everybody. Have a good day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.