Trinity Biotech plc (NASDAQ:TRIB) Q1 2022 Earnings Conference Call June 30, 2022 11:00 AM ET
Joe Diaz - Lytham Partners, IR
Ronan O’Caoimh - Chairman and Chief Executive Officer
John Gillard - Chief Financial Officer and Director
Conference Call Participants
Jim Sidoti - Sidoti & Co
Good day, and welcome to the Trinity Biotech First Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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, sir.
Thank you, Matt, and thanks all of you, for joining us today. The management team of Trinity Biotech will review the financial results of the first calendar quarter ended March 31, 2022.
Joining us on today's call is Ronan O'Caoimh, 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 factor 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 occurrences of unanticipated events.
With that said, I will now turn the call over to John Gillard, Chief Financial Officer, for a review of the quarter results. He will be followed by Ronan O'Caoimh, CEO to provide further details. John, please proceed.
Thank you, Joe. Good morning, everyone. Now I will take you through the results for Q1 2022. Starting with revenues, total revenues for the quarter were $18.8 million compared with $25.6 million in Q1 2021. As Joe pointed out, and as our typical approach, Ronan will discuss revenues in further detail later on the call. As such, I will move on to discuss other aspects of the income statement.
Before I begin, I will point out that the company recognized once-off accounting charges in Q1 primarily related to the refinancing and repayment of its exchange notes. I will give further details later on those charges. But for now, the numbers I quote exclude the impact of those charges.
Gross margin for the quarter was 38.7% compared to 42.6% achieved in Q1 2021. The reduction in gross margin is mainly due to the very strong sales and margins recorded in Q1 2021, within our COVID-19-related portfolio of products. In the year since then, pricing for such products has fallen progressively because of lower demand as the level of PCR testing for COVID has declined in North America, and the availability of greater supply from other manufacturers has also negatively impacted demand. As ever, our gross margin remains susceptible to product mix changes, geographic spreads, currency fluctuations and product level variation.
Moving on to R&D expenditure, this decreased to $1 million compared to $1.4 million in Q1 2021. The company continues to focus on operating efficiency and cost control and has continued to reduce headcount as it pursues greater automation and simplification of processes. Meanwhile SG&A costs are broadly stable at $5.9 million, down approximately $100,000 versus the corresponding quarter in 2021. This resulted in an operating profit for Q1 2022 of $0.2 million compared to $3.1 million reported in Q1 2021.
The aforementioned reduction in revenue and margin contribution from our COVID-related portfolio of products was the main driver of that reduction in operating profit with these being somewhat offset by lower R&D and SG&A expenses.
Moving on to financial expenses of $2.2 million, as you may have seen from prior press releases, the company refinanced the majority of exchangeable notes during the quarter, and this has resulted in a change in our interest profile. Financial expenses in Q1 2022 were $2.2 million compared to $1.2 million in Q1 2021. The increase of $1 million is due to the debt refinancing, which took place at the end of January 2022. $99.7 million of the company's exchangeable notes, which had a coupon rate of 4%, were replaced by a senior secured term loan of $81.3 million at an interest rate in the quarter of 12.25%.
The remainder of the financial expenses consist of notional financing charges arising on leased assets, arising from IFRS 16, which was approximately $0.2 million in both quarter 1, 2022 and quarter 1, 2021. You will note that there is also a noncash financial expense of $0.1 million this quarter. And this number comprises accretion interest and the amortization of term loan origination costs, which were partially offset by income arising on the fair value remeasurement of two derivative balances related to the new term loan. I will talk more about these derivative balances later on.
Loss after tax before once-off items and noncash financial income was $1.9 million in Q1 2022 compared to a profit of $1.8 million in Q1 2021. As in prior quarters and as set out in the press release, we report earnings per ADS, effectively our equivalent of EPS. Our earnings per ADS have decreased from $0.077 in Q1 2021 to a loss per ADS of $0.50 in Q1 2022. As I previously mentioned, the company incurred one-off costs in the quarter. I want to provide you with more information on those now.
At our January EGM, our shareholders approved resolutions, which facilitated refinancing transactions with respect to substantially all of the company's $99.9 million exchangeable notes. The accounting measure of the total consideration for the retirement of those exchangeable notes was $92.9 million, comprising of cash consideration of $86.7 million and ADS’ in the company with a market value at the date of issue of $6.2 million. Exchangeable notes were treated as a host debt instrument under IFRS with embedded derivatives attached. The embedded derivatives relate to a number of put and call options, which were measured at fair value in the income statement.
On initial recognition in 2015, the host debt instrument was recognized at the residual value of the total net proceeds on the bond issue less the fair value of the embedded derivatives. Subsequently, the host debt instrument was measured at amortized costs using the effective interest rate method.
At date of disposal, the carrying value of the extinguished exchangeable notes was $83.2 million. As the IFRS accounting measure of consideration was higher by $9.7 million, the resulting loss on disposal was recorded as a one-off charge in the income statement in Q1 2022. However, from a commercial perspective, I would point out that we obtained approximately a 7% discount on the repayment of the exchange notes. The remainder of the one-off items in Q1 2022 comprises $600,000 of professional fees primarily in relation to the aforementioned refinancing.
I will now discuss the accounting treatment of our term loan credit facility with Perceptive Advisors. It's a four year term loan of $81.3 million. In accordance with IFRS accounting standards, the term loan is represented by three separate balances in our balance sheet. $76.2 million is shown in long-term liabilities as a senior secured term loan. At initial recognition, the balance comprised of principal loan amount of $81.3 million, less loan origination cost of $3.6 million less two derivative financial balances totaling $1.7 million to give a balance of $76 million. In Q1 2022, accretion interest and the amortization of loan origination costs of $0.2 million were recorded to give a closing carrying value of $76.2 million at March 31, 2022.
The other two balances are one, a derivative financial asset. And two, a derivative financial liability. And these are initially recognized at fair value under IFRS 9. The derivative financial asset is valued at $0.2 million at March 31, 2022, and represents an estimate at that date of the value to the company of being able to repay the term loan early and potentially refinance at lower interest rates. The derivative financial liability is valued at $1.7 million at March 31, 2022, and represents the fair value of the warrants issued to Perceptive. The fair value remeasurement of these two derivative financial balances in Q1 2022 resulted in a noncash financial income of approximately $0.2 million being recognized in the income statement.
I will now move on to address some of the main balance sheet movements we have seen since quarter 4 of 2021. Intangible assets increased by $1.3 million, which is made up of additions of $1.6 million partially offset by amortization. Moving on to inventories, you will see that these have increased by 1.7% since last year-end, which is in the normal range of fluctuation for our inventory levels and are largely influenced by timing variations in the fulfillment of purchase and sales orders. As I described earlier, during the quarter, the majority of the exchangeable senior notes retired. And as a result, the associated liability has reduced from $83.3 million to $210,000 during the quarter.
Finally, I will discuss our cash flow for the quarter. Cash generated from operations during the quarter was an outflow of $1.3 million. The debt refinancing and exchangeable notes payment resulted in a net cash outflow of $9 million. The company paid $3.1 million in interest on the exchangeable note and the term loan. The other major cash flow for the quarter included a capital expenditure of $1.8 million. Overall, this resulted in a cash balance of $10 million at the end of March 2022.
However, the amounts mentioned above are below the 45 -- or before the $45 million strategic investment received from MiCo Group in May 2022. As we mentioned on our last conference call, we expect that the MiCo investments will support us in refinancing the Perceptive debt in the near term by reducing our leverage. To that end, in May 2022, we repaid almost $35 million of the $81 million nominal amount of the loan. This should reduce our annual interest cost by over $4 million. We are also engaged with a number of potential credit partners regarding the refinancing of the balance of the Perceptive debt.
However, at the same time, we're examining how best Trinity Biotech can capture growth and value from the development in the decentralized diagnostic testing market given the consumer and health care provider changes post the COVID pandemic conditions, especially so, given our new strategic partnership with MiCo Group. The decisions we make about how best to capture those growth opportunities will impact on the type of credit partner that can best support our growth over the medium term. And as such, we intend to be thoughtful about what type of replacement finance and partner we proceed with.
I will now hand back to Ronan, who will bring you through the revenues.
Thank you. I'm going to review quarter 1 revenues before opening the call to question-and-answer session. Our revenues for quarter 1 were $18.8 million compared with $25.6 million in the corresponding quarter last year, which is a decline of 27%. Point-of-care revenues for quarter 1 increased to $2.2 million from $1.9 million in quarter 1 last year, which is an increase of 15%. This increase was driven by higher HIV revenues in Africa, while non-HIV Point-of-care revenues, which mainly comprise syphilis, were broadly unchanged from the prior quarter.
However, in February, we received WHO approval for our TrinScreen HIV test, and since then, a number of country algorithms in Africa have come up for review. And we are deeply involved in endeavoring to be selected as the HIV screening choice in those countries. We are very encouraged to be making such rapid progress so quickly after approval. We believe that this product will be a significant growth driver for the company.
Moving on to Clinical Laboratory, our revenues were $16.6 million compared with $23.7 million in the corresponding quarter, representing a decrease of 30%. This decrease is almost entirely due to lower revenue from our COVID-19-related portfolio of products, and in particular, reduced sales of our PCR Viral Transport Media products. Sales volumes for PCR Viral Transport Media products have decreased since the first half of 2021 due to significant scaling down of PCR testing programs for COVID-19 with unit selling prices also decreasing due to a ramping up of global manufacturing capacity in the market.
And meanwhile, last month, we received CE Mark European approval for our 10-minute COVID-19 antigen test. In addition to its ease of use and impressive speed result, in extensive clinical trials, the test demonstrated 99% sensitivity and 99% specificity, which are accuracy levels superior to most tests currently on the market. We are now actively marketing the product throughout Europe. And MiCo BioMed are marketing the product in Southeast Asia, where their distribution channels are strong. Meanwhile, we are proceeding for an FDA approval of the product.
Moving on to diabetes testing, our premier revenues increased over 20% when compared with quarter 1 of 2021, reflecting the fact that patients are returning to their doctors to perform their hemoglobin -- hemoglobin A1c tests on a regular basis as the impact of the pandemic is lessening. During the quarter, we placed 54 instruments as instrument placements returned towards normalized levels. Meanwhile, Fitzgerald, which is our life science business, performed strongly with revenues in line with the corresponding quarter last year.
Our autoimmune revenues decreased by 4% primarily due to lower revenues in our reference laboratory. This relates to our New York reference laboratory, which offers laboratory testing services for autoimmune disorders such as Sjogren's, hearing loss, celiac, lupus, rheumatoid arthritis and systemic sclerosis. Our revenues for our proprietary Sjogren's syndrome test increased significantly. These were offset by a reduction in testing for other disorders due to fewer patients visiting the physicians for pandemic reasons and also due to supply chain constraints.
We expect demand for Sjogren's testing to continue to grow as there appear to be a commonality between Sjogren's symptoms and long COVID. In addition, we continue to focus on expanding the range of tests available at our reference laboratory, including testing panels specifically aimed at autoimmune conditions associated with lung COVID.
As you know, we were delighted to announce a $45 million investment in the company by the MiCo Group in April at an average effective share price of $2.60 per share, and the transaction closed in early May. And as John said, we utilized most of the money for the immediate pay down of the high-yielding Perceptive debt, resulting in a reduction in annual interest of $4 million.
However, we are confident that this investment will enable the elimination of the balance of the high-yield debt with low-cost bank funding and that we can achieve this in the short term even as John has said that we are well advanced in that endeavor. With the restructured balance sheet, we believe that Trinity can now move forward with confidence and the recent events constitute a new beginning for the company.
As well as injecting capital into the company, MiCo Group owns a medical diagnostic subsidiary, MiCo BioMed. And that company has a range of innovative technologies, including Lab-on-a-Chip and artificial intelligence-based rapid point-of-care testing applications as well as the desktop molecular PCR test platform that has achieved 800 placements over the past years -- past 2 years. Through distribution and joint development agreements, it is intended that Trinity will distribute the MiCo BioMed molecular PCR and next-generation ELISA diagnostic platform in Trinity's core markets, including North America and Western Europe, thereby providing Trinity with a significant expansion of its product portfolio.
Trinity is now in a position to strengthen its management team. And in that respect, I'm really pleased to announce the appointment of Dr. Yung Han [ph] as Chief Strategy Officer of the company. Dr. Han brings to the company a wealth of experience, particularly in rapid point-of-care diagnostics in the U.S., in Africa and in Southeast Asian markets. And I think this reflects our commitment to grow our rapid point-of-care business worldwide.
So if I could now open the call to a question-and-answer session, please.
Thank you. [Operator Instructions] And our first question will come from Jim Sidoti with Sidoti & Company. Please go ahead.
Hi, good afternoon. Thanks for taking the questions, Ronan. You mentioned the Viral Transport Media revenue was down. I believe it was around $8 million in the year-ago quarter. Can you tell us what it was for the first quarter of 2022?
Yes. About $2 million, Jim.
About $2 million. So was down about $6 million?
Okay. So I mean that's really the bulk of the revenue decline then is the VTM revenue, it looks like.
Okay. All right. And do you think it will remain steady at around $2 million a quarter? Or do you think it will continue to decline throughout the year?
I think we'll see a drop off in Q2. And I think we'll see a ramp up in Q3, second half of Q3. And then as we go into Q4, I think we'd expect to see demand increase again.
This is Ronan…
I'm sorry. Go ahead.
No, I was going to say, in addition to that, of course, now we've received a CE Mark approval for our COVID antigen test. And so we should see revenues commence there.
Right. And that was going to be my next question. You've gotten two major approvals since February, the antigen test and the TrinScreen. Can you give us an update on when you think you'll start generating revenue from those products?
In terms of TrinScreen, a number of algos that have just happened to have kind of opened up for review and renewal. And so we're seriously in the chase in a number of countries, single-digit number of -- low single-digit three or four countries, where we're -- five countries where we're pursuing basically -- looking to be included in the new algorithm. And it's too hard to be sure, but we're doing well. We're doing well, and there's a few of them are significant countries. We're very encouraged by how we're doing.
So it's still a task to replace an incumbent who's been in there for a significant amount of time. But it's looking very encouraging. I mean, bearing in mind that the WHO themselves ran a very significant trial, which resulted in 100% sensitivity and 100% specificity and puts us in a really good position in that sense.
And what about the point-of-care test for COVID?
So in term of COVID, we've received just in the past number of weeks, CE Mark approval, which enables us to sell the product throughout Europe. But in addition to that, it actually opens up many other international markets, albeit not the U.S. market. So many other countries outside of Europe will accept the CE Mark. So as I mentioned in my prepared remarks, MiCo BioMed, who have a strong distribution channel in Asia and Southeast Asia, are endeavoring to sell the product there. And meanwhile, we are basically working on selling the product through our distributor base or indeed, in some cases, directly in Europe.
So we haven't made any breakthroughs yet. But bear in mind, we're literally only half week [ph] into the market. But we're very encouraged by developments. And we're seeing a resurgence of COVID levels, COVID infections at the moment. And so we're optimistic about breaking into the market. And meanwhile then we're pursuing an FDA approval.
And so as sales of these two products start to ramp, are you fairly confident that the first quarter of 2022 will be the lowest quarter revenue-wise of the year?
I mean, I don't know. Obviously, I'd hope so. But I don't want to say -- I mean, Jim, yes, I suppose so, but I'm reluctant to indicate otherwise.
I think you would be hopeful -- we'd expect that H2 is going to be stronger than H1 because we have those new products coming out of the market with sufficient time from regulatory approval to be able to get sales in America and get those volumes out.
All right. I think that -- I'm sorry.
In overall terms, we're very optimistic. I mean, at this moment in time, I talked about a new beginning. I mean, we have moved from a situation where we were extremely worried about repaying $100 million loan note in circumstances where we didn't really have the funds to do so, to a situation where we've repaid that, where we brought in $45 million worth of equity at a price -- average price of $2.60 per share. Thereby, I think restructuring and effectively, very significantly restructuring our balance sheet.
We've got a very strong partner, who brings not just a lot of money to the table but also a lot of expertise in terms of -- they're well-funded. They have a significant diagnostic business of their own, and they've got a strong management team, and got a lot of enthusiasm. They have multiple investments in various diagnostic sectors, mostly in point-of-care areas. And they intend, I think, to use Trinity Biotech as the medium to bring these products -- all these various products to market, many products that we haven't talked about.
We're not really necessarily in a position to talk about yet, but really, really interesting, innovative products. So basically what we have is we have Chairman of MiCo BioMed who basically has invested significantly his own personal money and he’s very interested in diagnostics and has invested significantly in multiple new point-of-care platforms. And we see all of these coming through Trinity Biotech.
In addition to that now, we are now in a position to invest in R&D, to look forward positively to bring in strong management, and we're doing that. We just have Dr. Yung joining us. And we're looking at new R&D programs. I think we'll have a focus on point-of-care, but it won't be exclusive in that area. And so I think we're moving forward with genuine confidence, and I think we're a company transformed.
I think you will see now over the coming weeks and months -- coming weeks, I think you'll see the final restructuring of the balance sheet. And thereafter, I think you're going to see -- at the same time, you're going to see significant management appointments. So very, I think a rebirth [ph] and we're very positive for the future. The approvals of both TrinScreen and the COVID antigen tests have been very significant as well, really.
Do you think now that the balance sheet has improved, it will be easier to negotiate contracts with new customers? Was that a concern in the past?
Frankly, it wasn't actually. No, it never -- that was never really an issue for us. But I mean, I think in bringing in strong management has been an issue or having the confidence to invest significantly in new research and development projects, to license -- the ability to, for example, license in technologies or do joint ventures with partners for innovative new products. I mean, it's very difficult to do any of those deals against the background of the 1 of April repayment of $100 million when you don't have it in your balance sheet.
So yes -- so I think at the customer level, I don't think it's been a problem. It hasn't held us back.
Okay. And how about in terms of management resources now? Are you able to now focus on some of these new opportunities now that you've got the balance sheet cleaned up?
Yes. Absolutely. Like I think we've spoken before about the changes that we see happening in the diagnostic industry post COVID, where people now have a new relationship with diagnostic providers. We see a continually increasing role for diagnostic providers who can provide solutions outside of the traditional health care setting, right? So whether it's at home, across -- over-the-counter products, point-of-care products they're going to be more and more a feature in people's health care journeys. They're typically faster. They're typically cheaper, which is also important in the context of maybe some of the economic headwinds that we're facing, right?
So we think that COVID has really led to breaking of significant adoption to do in people learning how to use these types of tests and being able to take biological samples themselves. And in that context, you have to ask the question, are people going to spend time going to their doctor to get a simple test where they can potentially do that at home themselves or do it in some other settings such as a pharmacy that's more towards point-of-care.
So we think the testing volume is going to come towards point-of-care, which is obviously a very strong area for Trinity and has been for 30 years. And then also, I suppose, as we see continued aging of the population and a greater use in people's lives of information and data to make decisions, the diagnostics really is a very powerful data source for people to take a significant role in their own health care journeys.
So we think there's a lot of kind of broader trends that feed towards where our business is because remember, we have a lot of features, Jim, outside of just being in point-of-care. We own or have our own lab. We develop our own tests. We manufacture our own tests. So we have a huge amount of that overall value chain associated with diagnostics in-house within Trinity.
I think to Ronan's point, with renewed financial confidence that gives us the opportunity really to aggressively attack those opportunities and derive growth and additional value from them.
I think that’s it for me. Thank you.
Thanks very much, Jim.
I don't believe we have any more questions. So could I just take this opportunity to say thank you very much. Good afternoon, and speak to you soon again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.