Earnings Call Transcript - TRIB Q3 2022

Operator, Operator

Good day, and welcome to the Trinity Biotech Third Quarter Financial Results Conference Call. All participants will be in 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 Joe Diaz with Lytham Partners. Please go ahead.

Joe Diaz, Investor Relations

Thank you, Kate, and thanks to all of you for joining us today to review the financial results of Trinity Biotech for the third quarter of 2022, which ended on September 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, let me 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. Trinity Biotech undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today. With that said, I will now turn the call over to John Gillard, Chief Financial Officer, for a review of the financial results. John, the floor is yours.

John Gillard, CFO

Thank you, Joe. Good morning, everyone. Now I will take you through the results for Q3 2022. Starting with revenues, total revenues for the quarter were $19.5 million, compared to $22 million in Q3 2021. As such, I will move on to discuss other aspects of the income statement. We have recorded significant excess and obsolescence charges related to inventory of $4.7 million this quarter. As this amount is material to the results this quarter, I will now bring you through the components of this charge. Firstly, there is a Viral Transport Media inventory write-down of $3.5 million. The situation relating to COVID-19 products has been fluid and hard to predict. Last year, when demand for PCR VTM products diminished, we took back our production. We decided to retain the capability to flex manufacturing volumes should market conditions warrant. As part of this strategy, we maintained an inventory of critical raw materials to allow a ramping up of VTM production to meet peak demand. So far we have not seen any evidence of current or future significant peaks in demand for PCR or VTM products this season. Consequently, the value of inventory has been written down for an estimate of its net realizable value. Secondly, we have written down the value of certain excess raw materials and work-in-progress amounting to $900,000. The third and final charge relates to a write-down of Tri-stat inventory amounting to $300,000. We undertook a strategic review of our Tri-stat instrument as part of a broader review of our haemoglobins product portfolio. With annual sales of approximately $200,000, Tri-stat is the least significant product. Consequently, we have written down the value of this inventory. All of what I have mentioned so far contributed to a gross margin of 10.3% this quarter. Excluding these significant inventory write-downs, the gross margin for the quarter would have been 34.4%, compared to 40.4% achieved in Q3 2021. The reduction in gross margin this quarter is mainly due to the very strong sales and margins recorded in the comparative period within our COVID-19-related portfolio of products. Since then, demand for COVID PCR tests has fallen significantly in North America. Additionally, our gross margin this quarter has been negatively impacted by rising prices for raw materials and an under recovery of labor and overhead costs at three of our manufacturing facilities due to reduced production activity. In relation to the other site in Jamestown, New York, we have started the process of transferring autoimmune product manufacturing from our Buffalo, New York site. In terms of dealing with margin erosion, we have already put through some sales price increases where market conditions allowed and we continue to monitor opportunities for additional price adjustments in the short-term. Moving on to our R&D expenditure, which was $1 million in the quarter, down by $40,000 compared to Q3 2021. Meanwhile, SG&A expenses in the quarter were $5.8 million, down approximately $320,000 compared to Q3 2021. We continue to focus on operating efficiency and cost control. We are also benefiting from a stronger U.S. dollar against the euro, reducing our euro-denominated SG&A expenses. Offsetting this are additional travel and trade show-related expenditures, reflecting an increase in sales and marketing, and senior operational staff travel post the lifting of many COVID-related travel bans. We believe it’s important for our sales and marketing staff to resume face-to-face interaction with our customers and partners. We have recorded impairment charges of $2.3 million this quarter compared to 0 in Q3 2021. The development project for the autoimmune smart reader was paused earlier in 2022, as we review options, including the potential to proceed with a third-party reader instead of our own internally developed reader. Following this review, we determined that there were likely greater opportunities to capture more market share in a more capital-efficient manner by partnering with a third-party reader manufacturer. Consequently, we have fully impaired the project’s carrying value of $1.3 million. The remainder of the impairment charge relates to Tri-stat. As mentioned earlier, we decided to restrict Tri-stat sales to certain targeted partnerships, resulting in an impairment of the carrying value of the Tri-stat tangible assets. This resulted in an operating loss for Q3 2022 of $7.1 million, compared to an operating profit of $2.8 million reported in Q3 2021. Moving on to net financial expenses of $1.9 million in Q3 2022, compared to $1.2 million in Q3 2021. The increase is mainly due to higher interest rates applying to our borrowers post the refinancing. Our cash balance decreased by $3.2 million to $7.3 million in Q3 2022. Cash generated from operations for the quarter was $700,000, an increase of about $100,000 compared to Q3 2021. In the first quarter of this year, we reported positive cash flow from operations as a result of trimming our cost base and better working capital management. I will now hand it back to Aris who will bring you to the revenue highlights.

Aris Kekedjian, CEO

Thank you, John. I’d like to take a few minutes before we answer any questions to go through the highlights for the quarter. Total revenues for Q3 2022 were $19.5 million. Excluding our COVID-focused PCR products, Q3 2022 revenues of $19.2 million were marginally higher by 2% compared to Q3 2021 and were up 6% compared to Q2 2022. A strong year-over-year increase of 30% was attributable to our haemoglobins and Fitzgerald businesses, offsetting the timing impact of atypical concentrated sales associated with Uni-Gold HIV in Q3 2021. We also had strong demand for Uni-Gold HIV product on a quarter-over-quarter basis, up 35%. We are experiencing particularly strong demand for our haemoglobin products in Asia-Pac and Latin America, with over 50% year-over-year revenue growth in Asia-Pac and over 40% in Latin America. We continue to scale our commercial coverage in these markets where the increase in diabetes is significant and our boronate affinity technology has a particular competitive advantage. In late August, the company submitted its 510(k) submission to the FDA seeking U.S. regulatory approval for Premier Resolution, our Hemoglobin Variants instrument. We are expecting to launch this product in Q2 of next year. In November 2022, we initiated the development of our next-gen flagship diabetes HbA1c instrument, the Premier 9210, expecting to launch in Q3 next year. This product should underpin substantial gross margin improvement in our haemoglobins business over the next couple of years. Since the World Health Organization approval in February 2022 of our TrinScreen product, we expect to conclude the current pilot program that’s underway. We believe we are going to be delivering Ministry of Health orders in Q1 and ramp up to approximately 6 million tests a year. With that, I think, we will open it up to questions.

Operator, Operator

The first question is from Jim Sidoti of Sidoti & Company. Please go ahead.

Jim Sidoti, Analyst

Hi. Good afternoon. Thanks for taking the questions. It seems like you have made some significant investments in the haemoglobin product line to accelerate growth there. If you look out to 2024, how many different Premier Instruments do you expect to have on the market and what markets do you think you will be in?

Aris Kekedjian, CEO

Let me let John provide some context around the numbers related to the plan. Our technology is somewhat unique as it prevents variant interference in the A1c testing process. This may not be as significant in the U.S., but internationally, where diabetes growth rates are highest, our technology is ideally suited. We are confident that we can place a considerable number of instruments in those markets. John, do you want to share some context on the numbers?

John Gillard, CFO

In terms of numbers, we have historically placed about 200 instruments a year, which has been reduced due to COVID. I’d expect once this redesign goes through, we should increase those placements from this historical run rate. In terms of the T20 instrument, we expect up to 100 placements of that once it’s established in the market.

Aris Kekedjian, CEO

For the new 9210, I would expect we would be running well ahead of where we were prior to COVID. I wouldn’t be surprised if we hit 250 to 300 units in the market on an annual basis. That’s what I would expect from my sales team.

Jim Sidoti, Analyst

But it sounds like, by 2024, you are going to have at least three versions of the Premier systems on the market, is that right?

Aris Kekedjian, CEO

That’s correct, including the Primary Resolution.

Jim Sidoti, Analyst

In terms of facility consolidations, is there enough capacity in Jamestown to continue to consolidate?

John Gillard, CFO

We are not closing our Buffalo site. We are expanding our autoimmune manufacturing capability. Our Jamestown site has historically dealt with our legacy infectious disease business and we expect that business to continue to reduce over time, so we are seeking to maximize the utility of the Jamestown site.

Jim Sidoti, Analyst

Okay. Any update on refinancing the remaining portion of the debt?

John Gillard, CFO

We continue to examine a number of options. We seek to do that as part of a strategic transaction.

Jim Sidoti, Analyst

But it sounds like guidance for the fourth quarter is similar to the guidance you gave at the end of last quarter of $19 million or so?

Aris Kekedjian, CEO

I think we will be a little lower in the fourth quarter. What I said last quarter was we are averaging around $18 million, $18.5 million ballpark. The initiatives we have been putting in place should start kicking in in early 2023.

Paul Nouri, Analyst

I am wondering if you could give us guidance on what gross margin will be compared to the third quarter going forward?

John Gillard, CFO

Not really at this stage, Paul, a lot of moving pieces, so I’d be reluctant to give guidance.

Paul Nouri, Analyst

The legacy business that’s been declining for years and was hit by lockdowns in China, how large does that business remain now?

John Gillard, CFO

It’s probably less than $2 million a quarter. There’s some evidence of a little bounce back, but that’s not an area that we are expecting to grow.

Aris Kekedjian, CEO

The key for us with respect to infectious disease is around autoimmune. We believe that this has significant synergy to rejuvenate our infectious disease business.

Operator, Operator

The next question is from Andrew May of Wells Fargo. Please go ahead. Andrew, is your line muted?

Aris Kekedjian, CEO

Kate, why don’t you move on.

Operator, Operator

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Aris Kekedjian for closing remarks.

Aris Kekedjian, CEO

I just wanted to address the recent 13D filing by the MiCo Group. My assessment of the situation is this is all about control and not about shareholder economics. A 29% stake does not entitle one to control. Our focus is on a complete turnaround, instilling operating rigor, building partnerships, and rejuvenating our growth potential. Thank you for joining us today. Enjoy the holidays. We look forward to an ambitious and exciting 2023.

John Gillard, CFO

Thanks, everybody.

Operator, Operator

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