Trinity Biotech PLC Q1 FY2023 Earnings Call

Hello, and welcome to the Trinity Biotech First Quarter Fiscal Year 2023 Financial Results. Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead.

Thank you, MJ, and thanks to all of you for joining us today to review the financial results of Trinity Biotech for the first quarter of 2023. 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, please note that statements made during this conference 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. 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. And Mr. Kekedjian will provide additional background and we'll open the call for your questions. Aris, the floor is yours.

Thank you, Joe. Good morning, everybody. I'd like to take a few minutes to update you on the summary highlights for the quarter and some of the strategic initiatives that we have underway. John will go through more detailed financials and then we'll open up the call for questions. With respect to the quarter, starting with the revenue discussion. Revenues for the quarter for Q1 2023 were $17.2 million, excluding our COVID-focused PCR products and Fitzgerald industries revenues, which were disposed of in April of 2023. Revenue for the quarter in terms of what is an ongoing business was about $14 million, about 2% higher than this period last year. Our performance in the quarter was led by year-over-year growth of approximately 35%, 15%, and 10%, respectively for autoimmune clinical chemistry and the diabetes HbA1C consumable products. Strong demand from key accounts and a focus on clearing order backlog drove an increase of over 80% in revenues for the U.S. autoimmune business compared to Q1 2022, and an approximately 45% increase in deliveries for diabetes consumables in Brazil compared to Q1 of 2022. These were partly offset by revenue gains that we had last year on instrument sales to China that were at a significantly lower margin. Those sales did not repeat this year, and that sale differential offset some of the benefits I just spoke to you about. Gross margin, excluding Fitzgerald, was broadly flat compared to Q1 2022, but we've had approximately a 4-point improvement over Q4 2022 as we increased prices and stabilized our manufacturing and supply chain processes. I'd like to take a moment to talk about our hemoglobin product activities. We continue to work closely with the FDA to gain clearance of our 510(k) submission for the Premier Resolution hemoglobin variant instrument. In addition to a U.S. market introduction in the second half of the year, we expect FDA approval will drive significant global order activity as many of our distributors await approval. We are repositioning technical sales capabilities for the post-FDA rollout. The development of the next generation of our flagship diabetes HbA1c instrument, the Premier 9210, is also on track for an expected rollout in early 2024. The instrument is expected to feature an improved backward-compatible reagent column system that should feature up to 3x the injection capacity and stability with limited calibration, and an improved user interface. This is the first step of a multi-generational product development plan aimed at expanding the target market, driving lower service downtime and cost while significantly expanding operating margins. These improvements we expect will have a significant impact in terms of COGS on our core diabetes franchise business. So that's one of the most important priorities we've got going on in the company. In addition, with respect to hemoglobins, both China and Brazil are markets of particular focus for both product line expansion as well as footprint expansion in both markets, both to drive cost competitiveness, streamline regulatory pathways, and expand market access. We already do some reagent activity, manufacturing activity in Brazil. We're looking at optimizing that platform and potentially looking at some opportunities for assembly in China. I'd like to take a moment to talk about our TrinScreen HIV product, which is ready to be launched. We are focused on executing the launch and distribution of this test, following the announcement by the Kenyan Ministry of Health of the adoption of our new rapid testing algorithm. The algorithm establishes Trinity Biotech as the HIV screening standard in testing in Kenya under World Health Organization guidelines. There have been some delays as the government is currently addressing some legal challenges to the HIV testing algorithm changes and we expect to receive significant orders in the second half of 2023 upon resolution of these legal matters. The Kenyan HIV screening program is one of the largest in Africa, with a potential of up to 9 million tests a year. The intention is to immediately ramp up to deliver several million tests in initial orders in the coming months. I'd like to take a moment to discuss portfolio transformation initiatives and our capital structure. In April, the company completed the sale of Fitzgerald Industries, generating approximately $30 million of proceeds that were partially used to further reduce debt by approximately $10 million. This exit is the first of several strategic moves aimed at focusing the current portfolio around our core hemoglobins and HIV franchises, streamlining our cost structure, reducing debt, and providing firepower for M&A. Our pipeline of attractive M&A opportunities is aimed at disruptive adjacencies where the total addressable markets are significant and matter. They also potentially provide us access to next-generation diagnostic product platforms and provide us an opportunity where we can leverage our global manufacturing and distribution footprint. In February, the company secured a $20 million flexible term facility, specifically to provide the ability to move quickly when opportunities or transactions arise. I'd like to take another moment to highlight and give an update on our structural and operational initiatives. Multiple initiatives are underway to significantly reduce the cost of goods sold in our core hemoglobins and HIV franchises. These include instrument and consumables design updates, supply chain optimization, outsourced and localized manufacturing, as well as overall streamlining of processes that support these businesses. All these initiatives are aimed at driving significantly higher operating margins in these platforms. We are pushing both platforms to have gross margins at or around 40% to 50% and operating margins in the 20% range. Those are our targets. Those are what we're working toward, and these initiatives will help us get there. As a final reminder, I would like to let everyone on the call know that Trinity Biotech will be participating at the American Association of Clinical Chemistry, otherwise known as AACC Annual Conference, taking place in Anaheim from the 23rd to the 27th of this month. We hope to see some of you there. With that summary, I'd like to pass it on to John to give you a more detailed review of our financials, and I'll be back at the end of the call.

Thank you, Aris. Good morning, everyone. Now I will take you through the results for Q1 2023. I would like to start by talking about the sale of our Fitzgerald Industries Life Sciences supply business, which was completed on April 27. We consider that life sciences supply was no longer core to the group's refined long-term strategy and pursued this transaction as part of our plan to transform into a high-growth innovator in diabetes care and decentralized diagnostic solutions. As Aris mentioned, we achieved cash proceeds of approximately $30 million which represented a multiple of approximately 10x Fitzgerald EBITDA on a historical basis. Fitzgerald generated revenue of approximately $12 million in fiscal year 2022. In our income statement for quarter 1, 2023, the results of Fitzgerald have been reported separately as discontinued operations. Therefore, the revenue gross profit and operating loss numbers I will talk about today are stated without Fitzgerald for both the Q1 '23 and comparative quarter. Moving on to our results for Q1. Starting with revenues, as Aris outlined already, total revenues for the quarter were $14.8 million compared with $15.7 million in Q1 2022. Gross margin for the quarter was 36.7% compared to 38.2% in Q1 2022. The reduction in gross margin is largely due to changes in the sales mix and the lower sales activity. I would point out that gross margin in Q1 2023 is substantially higher than Q4 2022 margin of 33.4%. And here, we are seeing the benefit of price increases and cost optimization initiatives implemented in mid to late 2022. Moving on to R&D expenditure, which was $900,000 in the quarter, down by $100,000 compared to Q1 2022. Meanwhile, SG&A expenses in the quarter were $8.6 million, up $2.4 million compared to Q1 2022. Of this increase, half of it or approximately $1.2 million was due to higher share-based payments expense. This is a noncash accounting charge relating largely to performance share-based compensation awards, which are intended to closely align the goals of our team with those of our shareholders and the creation of shareholder value. The majority of these options granted in Q4 2022 and in Q1 2023 are performance share options and are structured such that they're exercisable only if the company's ADS price increases to certain levels, $3, $4 and $5 per ADS during the life of the option. None of these performance share options are currently exercisable. The remaining increase in SG&A expense was largely due to higher travel and expenses following the lifting of COVID travel restrictions, higher salary costs from senior leadership team appointments in late 2022. Lastly, foreign exchange loss largely related to the accounting-driven requirement to mark-to-market euro-denominated lease liabilities for right-of-use assets. This resulted in an operating loss for Q1 2023 of $3.9 million compared to an operating loss of $1.2 million reported in Q1 2022. Moving on to net financial expenses of $2.4 million in Q1 2023 compared to $12 million in Q1 2022. The decrease of $9.6 million is because the comparative period included a loss on disposal of exchangeable notes of $9.7 million. Excluding this nonrecurring financial expense, financial expenses for Q1 2022 were $2.5 million compared to $2.6 million in Q1 2023. Although our borrowings are now significantly smaller following our payments of debt, the interest expense is broadly similar for Q1 as our main borrowing accrued interest at a significantly higher interest rate than during Q1 2022 due to base interest rate increases. Given our repayment of debt from the Fitzgerald transaction, we should see a reduction in those interest costs assuming stable interest rates in the following quarters. Profit for the period in discontinued operations was $0.5 million in Q1 2023, down from $0.8 million in Q1 2022 due to lower profitability of the now disposed Fitzgerald's business. In Q1 2023, the loss per ADS is $15.2 compared to $0.50 loss per ADS in Q1 2022. I will now move on to address some of the main balance sheet movements we have seen since quarter 4, 2022. The Assets and liabilities attributable to Fitzgerald industries have been separately presented within assets included in disposal group held for sale and liabilities included in disposal group held for sale separately, in the balance sheet at 31st March 2023. Intangible assets decreased by $13.9 million. This is made up of the Fitzgerald Industries intangible assets of $14.1 million, which are now shown in assets included in disposal group held for sale. Amortization was $0.3 million, and this is partly offset by additions of $0.5 million, which mainly comprises capitalized R&D expenditure. Financial assets have increased by $1.5 million. This relates to our investment in imaware which we announced in January 2023. At March 31, '23, $0.7 million has been invested with the $0.8 million balance recorded in current liabilities on the consolidated balance sheet. I must note that the convertible note investment, which represents an investment in unquoted equity instruments, is presented as a financial asset on the consolidated balance sheet. As the instruments do not have a quoted price in an active market for an identical instrument, the determination of fair value involves the use of appropriate valuation methods and certain unobservable inputs requiring significant management judgment and estimation and may change over time. I would highlight that the valuation of this asset may be subject to a wide range of possible fair value measurements and may fluctuate significantly due to changes in market variables as well as available entity-specific information. The senior secured term loan liabilities increased by $4.9 million during the quarter, following the drawdown of an additional $5 million facility from Perceptive Advisors in February 2023. Also in the quarter, the company secured from our lenders a new $20 million facility to fund potential acquisitions, as Aris mentioned. None of this $20 million facility has been drawn down to date, although as we've discussed, we are actively looking at potential acquisitions. Finally, I will discuss our cash flow for the quarter. Our cash balance, including cash generated by Fitzgerald decreased by $2.4 million to $4.2 million in Q1 2023. Cash used by operations for the quarter was $2.7 million, an increase of about $1.2 million compared to Q2 2022. Capital expenditure cash outflows comprising PP&E and R&D spend and the investment in imaware were $1.3 million, a reduction of $400,000 compared to the comparative period. Interest payments in the quarter were $2.6 million. I will now hand it back to Joe. Thank you.

Thank you, John. We will now go ahead and begin the Q&A session. MJ, please set up.

Today's first question comes from Jim Sidoti with Sidoti & Company.

Can you break out what the COVID, the VTM revenue was in the quarter? I think it was about 2. But is that right?

Just a second, I got that. I believe it was for the quarter 780,000 which was just slightly higher than last year, about a couple of hundred thousand.

But down about $1.2 million from a year ago?

From a year ago, yes, definitely down by $1.29 million last year. Our expectations on COVID right now are very hard to predict, and we are not relying on it.

Okay. You talked a little bit about Kenyan product. Is there another legal hurdle you have to get past? When do you think you'll start shipping product in Kenya?

Well, look, all I know is that the government is confident that this challenge is going to get ruled in their favor. They're putting significant pressure on us to be ready and available to deliver millions of tests between now and the end of the year. They've indicated they'd like to start with a $1 million order immediately. So we are literally gearing up and ready. And I believe there's a key court date. John, I believe it's the second week in July, if I'm not mistaken, next week.

I think on the 10th of July.

Okay. So it sounds like you do expect revenue in 2023 from Kenya?

Yes, definitely. From our perspective, based on the government's actions and expectations, this is their challenge. They seem confident. We are receiving feedback and have team members in regular contact on the ground. The general consensus is that there is no substance to the case, and they are likely to succeed. This situation is not surprising, as it is expected for an established player in the market to resist as much as possible.

Got it. And then with the new diabetes instrument, can you give us a little color on when you think those products might hit the market?

Well, look, we've done a large number of reviews of the FDA around the Premier Resolution. I think those have been concluded now, is our understanding. And we are expecting some news imminently from them. We are gearing up our team appropriately to be prepared at AACC to highlight the product, and we are gearing up our technical sales resources to be ready to go immediately. So those are all in place. Our expectation is to be ready for this coming quarter. Regarding the hemoglobin variants and the diabetes instrument on the 9210, our main product, we are currently conducting stability testing on the columns. We are also working on key redesigns that are nearly complete, which will greatly enhance the service quality and reduce maintenance costs associated with the product.

John will probably give you a little context around some of the supply chain initiatives and the in-sourcing activities that are underway. But my expectation is that we will be in the market with the column updates and the quality redesigns in terms of the Phase I improvements in early '24. And I think the supply chain improvements and those COGS benefits should start trickling in by the second quarter. Is that fair?

Okay. On the autoimmune business, which I believe you said was up about 35% in the quarter. Is that the business in upstate New York, the lab business?

It's the associated test manufacturing business connected to the lab, yes. And a lot of that activity was a rebound in our U.S. order book and clearing of some backlogs.

So it sounds like you have multiple areas where you expect things to improve. You just reported Q1 around $15 million. I would imagine you have a pretty good handle on what you think revenues are for Q2. Can you give us any kind of range where you think revenues come in for the year? Or is it still too early to provide guidance?

I think it's too early to give you guidance for the year. I think revenues for this quarter for Q2 will be ramped around close to $14 million, something like that, I would imagine, $14 million. But we're still closing the books. In terms of how the profile plays out, a lot of what we're talking about here, the inflection points play out in the second half, okay? So Kenya and TrinScreen and scaling of that business plays out in the second half. All of the changes that John and I talked about with respect to both the hemoglobins product launch, sorry, the launch of the hemoglobins product is also a second half play and all the changes around the 9210 are happening in the next six months. I don't expect an immediate rebound of these things, but I do expect key milestones that you'll be able to see in the coming quarters that we can point to where we get traction around orders and we get traction on the COGS benefits. We'll highlight those as we go here in the coming months.

All right. Thank you. That was it for me.

Being no further questions in the queue. I would like to turn the call back over to Aris Kekedjian for closing remarks.

Thank you for attending our call today. I know it's a bit of a tight holiday week for a number of people in the U.S. I apologize ahead of time. I've said to the people we will report on a more timely basis. This quarter was on me. We got caught up on a number of corporate development initiatives in travel, and I'll take blame for that and ensure it doesn't happen again. That being said, thank you for being on this journey with us, and we will keep you posted as developments arise. Have a good day.

The conference has now concluded. Thank you for your participation. You may now disconnect.