Trinity Biotech Q1 2023 Earnings Call Transcript

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Provided by Quartr
July 6, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to the Trinity Biotech First Quarter Fiscal Year 2023 Financial Results. 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.

Operator

Please go ahead.

Speaker 1

Thank you, MJ, and thanks to all of you for joining us today to review the financial results of Purity Biotech for the 1st quarter of 2023. Joining us on today's call are Erez Katigan, Chief Executive Officer and John Gillard, Chief Financial Officer.

Speaker 2

At the

Speaker 1

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 20F 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.

Speaker 1

With that said, I will now turn the call over to CEO, Erez Gakigan, for opening remarks. He will be followed by CFO, John Gillard for a review of the financial results. And Mr. Kiejian will provide additional background and we'll open the call for your questions. Eris, the floor is yours.

Speaker 2

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. General 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.

Speaker 2

Revenues for the quarter for Q1 2023 was $17,200,000 excluding our COVID focused PCR products and fixed share of industries revenues, which was disposed in April of 2023, revenue for the quarter in terms of what is an ongoing business was about $14,000,000 dollars 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 backlogs 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.

Speaker 2

These were partly offset by revenue gains that we had last year on instrument sales with 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 4 point improvement over Q4 2022 as we increase prices and stabilize 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 submission for the premier resolution hemoglobin variant instrument.

Speaker 2

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 capability for the post FDA rollout. The development of the next generation of our flagship diabetes HbA1c instrument, the PREMIER 9,20010 is also on track for an expected rollout in early 2024.

Speaker 2

The instrument is expected to feature an improved backward compatible reagent column system that should feature up to 3 times the injection capacity and stability, 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 improvement 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.

Speaker 2

We already reduced 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 TwinScreen HIV product, which is ready to be launched. We are focused on executing on 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 for tests in Kenya under World Health Organization guidelines.

Speaker 2

There have been some delays as the government currently is addressing some legal challenges to the HIV testing algorithm changes and we expect to receive significant orders in the second half of twenty twenty three upon resolution of these legal matters. The Kenyon HIV screening program is one of the largest in Africa. There's a potential of up to 9,000,000 tests a year and the intention is to immediately ramp up to deliver several million tests and 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 $30,000,000 of proceeds that were partially used to further reduce debt by approximately $10,000,000 This exit is the first of several strategic moves aimed at focusing the current portfolio around core hemoglobins and HIV franchises, streamlining our cost structure, reducing debt and providing firepower for M and A.

Speaker 2

Our pipeline of attractive M and A opportunities is aimed at disruptive adjacencies where the total addressable markets or TAMs 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 $20,000,000 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 cost of goods sold in our core hemoglobins and HIV franchises.

Speaker 2

These include instrument and consumables design updates, supply chain optimization, outsource 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. Are pushing both platforms to have gross margins at or around 50% 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.

Speaker 2

As a final reminder, I'd 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 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 more details on your financials and I'll be back at the end of the call.

Speaker 3

Thank you, Aras. 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 last. 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.

Speaker 3

As Aris mentioned, we achieved cash proceeds of approximately $30,000,000 which represented a multiple of approximately 10 times Fitzgerald's EBITDA on a historical basis. Fitzgerald generated revenue of approximately $12,000,000 in fiscal year 2022. In our income statement for quarter 1, 2023, the results of Fitzgerald have been reported separately comparative quarter. Moving on to our comparative quarter. Moving on to our results for Q1, starting with revenues.

Speaker 3

As Iris outlined already, total revenues for the quarter were $14,800,000 compared with $15,700,000 in Q1 2022. Gross margin for the quarter was 36.7 percent compared to 38.2% in Q1 2022. The reduction in gross margin is largely due to changes in 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 percent. And here we're seeing the benefit of price increases and cost optimization initiatives implemented in mid to late 2022.

Speaker 3

Moving on to R and D expenditure, which was $900,000 in the quarter, down by $100,000 compared to Q1 2022. Meanwhile, SG and A expenses in the quarter were $8,600,000 up $2,400,000 compared to Q1 2022. Of this increase, half of it or approximately $1,200,000 was due to higher share based payments expense. This is a non cash 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. Majority of these options granted in Q4 2022 and in Q1 2023 are performance share options and are structured such that they are exercisable only if the company's ADS price increases to certain levels $3 $4 $5 per ADS during the life of the option.

Speaker 3

None of these performance share options are currently exercisable. The remaining increase in SG and A expense was largely due to higher travel and expenses following the lifted of COVID travel restrictions, higher salary costs following senior leadership team appointments in late 2022. And 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 Q1, 2023 of $3,900,000 compared to an operating loss of $1,200,000 reported in Q1, 2022. Moving on to net financial expenses of $2,400,000 in Q1 2023 compared to $12,000,000 in Q1 2022.

Speaker 3

The decrease of $9,600,000 is because the comparative period included a loss on disposal of exchangeable notes of 9,700,000 dollars Excluding this non recurring financial expense, financial expenses for Q1 2022 were $2,500,000 compared to $2,600,000 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 on foot of the Fitzgerald transaction, we should see a reduction in those interest costs assuming stable interest rates in the following quarters. Profit for the period and discontinued operations was $500,000 in Q1 2023, down from $800,000 in Q1 2022 due to lower profitability of the now disposed Fitzgerald business. In Q1, 2023, the loss per ADS was $0.152 compared to $0.50 loss per ADS in Q1, 2022.

Speaker 3

I will now move on to address some of the main balance sheet movements we have seen since quarter 4 2022. Assets and liabilities attributed 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 31 March, 2023. Intangible assets decreased by $13,900,000 This is made up of the Fitzgerald Industries intangible assets of $14,100,000 which are now shown in assets included in disposal group held for sale. Amortization was $300,000 and this is partly offset by additions of $500,000 which mainly comprises capitalized R and D expenditure. Financial assets have increased by $1,500,000 This relates to our investments in Imerware, which we announced in January 2023.

Speaker 3

At March 31, 2023, dollars 700,000 have been invested with the $800,000 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 quota price in an active market for an identical instrument, the determination of fair value involves use of appropriate valuation methods and certain unobservable inputs, requires significant management judgment in destination 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 $4,900,000 during the quarter following the drawdown of an additional $5,000,000 facility from Perceptive Advisors in February 20 23.

Speaker 3

Also in the quarter, the company secured from our lenders a new $20,000,000 facility to fund potential acquisitions as Aris mentioned. None of this $20,000,000 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 owed by Fitzgerald decreased by 2,400,000 dollars to $4,200,000 in Q1 2023. Cash used by operations for the quarter was $2,700,000 an increase of about 1.2 Q2 2022.

Speaker 3

Capital expenditure cash outflows comprising PP and E and R and D spend and the investments in the Aimware were $1,300,000 a reduction of $400,000 compared to the comparative period. Interest payments in the quarter were $2,600,000 I will now hand it back to Joe. Thank you.

Speaker 1

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

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Speaker 4

Hi, good afternoon. Can you break out what the COVID, the BTM revenue was in the quarter? I think it was about 200 or 3 ounces. Is that right?

Speaker 2

Just a second, I got that.

Speaker 4

I believe it was for the quarter

Speaker 2

780,000 780,000. Which was just slightly higher than last year about a couple of 100,000. But down about $1,200,000 from a year ago? From a year ago, yes, definitely down by $1,200,000 last year.

Speaker 4

Okay. We stopped I

Speaker 2

mean, our expectations on COVID right now are very hard to predict and nothing we're relying on.

Speaker 4

You talked a little bit about Kenya. It sounds like there's another legal hurdle you have to get past. When do you think you'll start shipping products to Kenya?

Speaker 2

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 like 1,000,000 of tests between now and the end of the year. They've indicated they'd like to start with $1,000,000 order immediately. So we're sorry, dollars 1,000,000 test order immediately. So we are literally gearing up and ready.

Speaker 2

And I believe there's a key court date. John, I believe it's the 2nd week in July, if I'm not mistaken, next week.

Speaker 3

10th July.

Speaker 4

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

Speaker 2

Yes, definitely. I mean, at least from the standpoint of what we are gauging from the government's actions, activities, expectations.

Speaker 1

And at the end of the

Speaker 2

day, this is their battle, right, at some point. So and they're feeling confident. So based on that, what we are getting is feedback from them. We've got guys on the ground who are in contact on a regular basis. The view is that there's no merit behind the case and they will prevail and this will go through.

Speaker 2

It's not unexpected. You would expect any company who's had this business for a while to push back as hard as they can.

Speaker 4

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

Speaker 2

Well, look, we've done, I believe, a large number of reviews of the FDA around the primary resolution. I think those have been concluded now is our understanding. And so we are expecting some news imminently from them. And 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.

Speaker 2

So those are all in place and our expectation is to be ready for this coming quarter.

Speaker 4

And then on And on

Speaker 2

that's hemoglobin variant that's going on the diabetes instrument on the 9,210. Our core products, we are in stability testing around the columns. We are in the process of the key redesigns are almost done with the testing. That will significantly improve the service quality and maintenance aspects and costs of the product. And John will probably give you a little context around some of the supply chain initiatives and the in sourcing activities that are underway.

Speaker 2

But my expectation is that we will be in the market with the column updates and the quality redesigns in terms of the Phase 1 improvements in early 2024. And I think the supply chain improvements and those COGS benefits should start trickling in by Q2 or so. Is that fair?

Speaker 3

Yes. So in terms of the in sourcing of the column, which we expect to significantly reduce down our cost of production of our consumable and that's towards its final stage in terms of quality review and technical review. We've given notice to our existing supplier that we will be moving away from them. So that's very real and we would expect that to start accreting financial benefit to us probably towards the end of Q3. And then in terms of the supply chain around our instrument bibbles, we are very much looking at outsourcing and offshoring certain aspects of those instruments to much lower cost locations in terms of supply chain.

Speaker 3

Chain. We are well advanced in Phase 1 on that and are currently testing samples and prototypes in terms of these modules. And then we're also actively examining supply chain changes for Phase 2. Our core objective around that is to make our instrument cheaper to produce, which then should allow us to supply that to our customers and distributors at a lower cost, which should effectively increase the total addressable market for our instrument. And that coupled with the increased injection per column and the increased reliability that we're also pursuing.

Speaker 3

And we think we give this another lease of life and allow us to compete at a lower price point, while continuing to deliver healthy margins.

Speaker 4

Okay. On the autoimmune business, which I believe you said was up about 35% in

Speaker 2

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.

Speaker 2

Order book and clearing us in backlogs.

Speaker 4

So it sounds like you have multiple areas where you expect things to improve. You just reported Q1 around $15,000,000 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?

Speaker 2

I think it's too early to give you guidance for the year. This is I think revenues for this quarter for Q2 will be around close to $14,000,000 something like that. I would imagine $13,000,000 $14,000,000 But we're still closing the books. But 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 Trin Screen and scaling of that business plays out in the second half.

Speaker 2

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 second half play and all the changes around the 9,200 and 10 are happening in the next 6 months and should be in the market in 2024. So 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. And we'll highlight those as we go here in the coming month.

Speaker 4

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

Operator

Seeing no further questions in the queue, I would like turn the call back over to Erez Gokhajan for closing remarks.

Speaker 2

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 will say that I will apologize ahead of time. I've said to people we will report on a more timely basis.

Speaker 2

This quarter was on me. We got caught up in a number of corporate development initiatives and travel and I'll take blame for that and make sure it doesn't happen again. But that being said, thank you for being on this journey with us and we will keep you posted as developments arrive. Have a good day.

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Key Takeaways

  • Q1 2023 revenue for the ongoing business was approximately $14 million, up 2% year-over-year, driven by strong growth in autoimmune assays (+35% in the U.S.), clinical chemistry (+15%) and diabetes HbA1c consumables (+10%), with Brazil diabetes up ~45%.
  • Gross margin was flat versus Q1 2022 but improved by ~4 points sequentially over Q4 2022 due to price increases and stabilization of manufacturing and supply-chain processes.
  • The company expects FDA clearance of its Premier Resolution hemoglobin variant instrument in H2 2023 to spur global orders and plans to launch a next-generation PREMIER 9,200/10 diabetes instrument in early 2024 with up to 3× injection capacity and lower COGS.
  • TwinScreen HIV is ready for launch in Kenya under a new national testing algorithm, with potential for several million tests once pending legal challenges are resolved (court date mid-July).
  • In April, Trinity Biotech sold Fitzgerald Industries for ~$30 million (using $10 million to reduce debt), secured a $20 million acquisition facility, and is refocusing on core hemoglobin and HIV franchises while driving cost-reduction and pursuing M&A to boost margins.
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