Trinity Biotech plc (NASDAQ:TRIB) Q4 2023 Earnings Call Transcript

Trinity Biotech plc (NASDAQ:TRIB) Q4 2023 Earnings Call Transcript April 4, 202

Trinity Biotech plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings! Welcome to the Trinity Biotech’s Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. At this time I’ll now turn the conference over to Eric Ribner, with Investor Relations. Eric, you may now begin.

Eric Ribner : Good morning everyone. And thank you for joining us on today call. Before we begin, please note that statements made during this presentation 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 events 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 statement in the company's annual report on Form 20-F filed with the Securities and Exchange Commission. Trinity Biotech undertakes no obligation to publicly advise, update or revise these forward-looking statements to reflect events or circumstances after today, or the occurrence of unanticipated events. And with that, I’ll turn the call over to John Gillard, CEO.

John Gillard: Thank you, Eric. Good morning everyone. And thank you for joining today's call. We really do appreciate you taking the time. This morning I will take you through some key business updates, including new financial guidance, our progress in our recently acquired biosensor business, and our comprehensive transformation plan, that I set out to investors in early March at the Emerging Growth Conference. I will then hand you over to Des to bring you through the financial results for Q4 and fiscal year 2023. Right now, Trinity Biotech is an experience diagnostic company that under new leadership and with fresh thinking plans to transform its existing business into a high-performing cash-generative enterprise. This morning we are pleased to introduce financial guidance which is predicated solely on growth from the existing businesses, including haemoglobin and HIV testing, and planned improvements to operating margins.

This does not include any contribution from the newly acquired biosensor platform technology. We are targeting approximately $20 million of annualized run-rate EBITDASO, so earnings before interest, tax depreciation, amortization, impairment, and share-based compensation costs, by Q2, 2025. This is based upon targeted annualized run-rate revenues of approximately $75 million by Q2, 2025. We believe that this guidance is achievable, based on our comprehensive transformation plan for the business which we will review in more detail today. Additionally, 2024 is already off to a strong start, which increases our conviction in our outlook. In addition to strengthening the base business, we aim to scale the company by building a global business in wearable biosensors, initially with a focus on continuous glucose monitors or CGMs. We believe that this product can be a real game changer for the company.

This represents the key growth driver for Trinity Biotech into the medium term. As many of you will know, just over two months ago, we announced the acquisition of the biosensor technology of Waveform Technologies. Waveform had an established and proven biosensor technology with a European Regulatory Approved CGM product. In addition to acquiring this technology and product rights, we have hired a number of key individuals who created this technology at Waveform. Using this established technology, we intend to update Waveform's existing product and launch a more affordable, high-quality CGM into a broad number of markets globally. Since the acquisition, we have been progressing this plan across a number of areas, including, one, building out our biosensor team, with a number of key appointments from established medical device and diabetes technology companies, such as Phillips, Johnson & Johnson and Lifescan.

Two, we have re-established CGM manufacturing capability. This greatly assists us in planning and executing sensor design improvements. This work is based on the existing CGM product design, and has been carried out with the assistance of world-class, external technical and design consultants. Three, the team is also initiating enhanced data analysis on Waveform’s large existing data bank of clinical trial results and we are very excited by the potential outcomes of that analysis. In addition to this technical work, we are progressing discussions and agreements with potential commercial partners, such as Bayer for the launch of our CGM products. Finally, we are establishing a scientific and user advisory group for CGM. This is to ensure that strong clinical outcomes and user needs remain at the forefront of our thinking.

As you can see, there are a broad range of activities ongoing, and we will keep investors appraised of our progress on this business as we advance our plan forward. Now I would like to transition over to discussing Trinity's comprehensive transformation plan for our existing business. This transformation plan is a key pillar of our new management team's fresh vision and strategy for the company. As I have said previously, this is a vision and strategy that builds on the past, but also breaks from the past, toward a future of more ambitious growth. As part of our near-term transition plan in 2024 and 2025, we will drive a step change in our financial performance. By building on our existing revenue base and eliminating unnecessary overhead and complexity, my immediate priority is to dramatically improve the financial performance of the company's existing business.

As such, we are totally focused on getting us to a position where Trinity's existing business is delivering substantial free cash flow. I believe this is critically important for three key reasons. Firstly, the obvious point, cash generated businesses are generally more valuable which increases value for our shareholders. Secondly, better performing businesses strengthen our balance sheet. And thirdly, we believe that our new and future biosensor technology provides a tremendous opportunity for a significant future growth and that a strong balance sheet will permit us to capitalize on this opportunity more rapidly. Looking at our transformation plans for the existing business, it had several key components that we believe are rapidly achievable, in most cases by mid-2025.

The three main components are, one, reducing complexity and cost through consolidation. Two, reducing cost of goods through negotiation and supplier changes. And three, further simplifying our internal operations through consolidation in lower cost locations. Let me expand on these. In the first of these, we are considerably reducing complexity and cost by consolidating our main manufacturing operations into a considerably smaller number of main sites, and also moving to an outsource model for a significant amount of our less complex manufacturing activities. As part of this initiative, we are today announcing that we will cease manufacturing at our Kansas site before the end of 2024. This site has traditionally supported our diabetes HbA1c testing and hemoglobin variant tests.

We believe that we can create multi-million dollar annualized operational efficiency by absorbing much of this activity into our other manufacturing footprint and outsourcing other aspects of operation. These additional efficiencies, coupled with the $4 million annualized savings from other projects in our diabetes HPA1c business are a game changer in terms of this business's profitability and cash flow generation profile. This will create a recurring revenue business of significant value. This change is part of a broader strategic objective to centralize our most complex and valuable manufacturing activities so as to maximize quality and intellectual property protection while outsourcing less complex manufacturing activities so as to drive efficiencies and reduce complexity.

By using this strategy, we believe we can significantly reduce our cost while maintaining the high quality of our products and protecting our intellectual property. In the second element, we are also considerably reducing the cost of goods of many of our products by changing suppliers and negotiating new deals with existing suppliers. This is an area where we have already achieved millions of dollars of annualized savings and I believe there is even more we can do here over the coming quarters. In the third element, we are further simplifying our internal operations and centralizing business support functions in lower cost locations. As such, today we are announcing a project to move a significant portion of our business support functions to a lower cost and centralized location.

This should drive a significant reduction in our SG&A expenditure, plus and very importantly, provide us with a cost efficient and highly scalable platform that can efficiently and rapidly support our expansion to the growth of our wearable biosensor business. We are currently well advanced in working with our partners and our staff on these changes, and we expect to have these changes complete by Q4, 2024. While many of these initiatives are focused on cost optimization, they are within our realm of control. As a result, I have a high degree of confidence that these will deliver the financial benefits we have targeted. In my prior role as CFO, before I took over as CEO in late December last year, we began planning and executing on many of these initiatives, and as a result we are already beginning to realize some of the financial benefits.

As you can see from today's announcements, we have clear steps underway to deliver the remaining benefits to the base business between now and Q2, 2025 when we are targeting approximately $20 million of annualized run rate EBITDASO. This is on targeted annualized run rate revenues of approximately $75 million. We plan to give further details on these initiatives and their progress during our future earnings announcements and presentations. As I had said before, we recognize that in this we are taking some big bets. But we believe these are necessary to deliver the fundamental change in financial performance that will emerge from a more streamlined and nimble organization. We have mitigated execution risk in the following ways. (A), putting in place a highly skilled and experienced team who have come from large and sophisticated organizations, and have a significant experience in driving and delivering these types of changed projects.

(B), careful selection of our transformation partners. We have selected highly capable and reputable outsourcing and supply chain partners who have a strong track record in our industry. And (C), developing a strong culture of change execution in the business. Our strong start in 2024 is a testament to the effectiveness of our efforts and the strong culture of execution we are building within Trinity. Let me share some examples. I am delighted and very proud of our team's performance in successfully scaling our rapid HIV testing manufacturing capacity in Q1, 2024 to meet the additional output requirements for TrinScreen HIV screening algorithm win in Kenya. Our ability to scale manufacturing output fourfold required some major changes in the business and the way it operates.

This was critical for us in demonstrating our capability and commitment to be a strong and reliable partner to our TrinScreen HIV testing partners, just as we have been for many years in our to our Uni-Gold HIV testing partners. We were also very pleased this week to receive a further purchase order for an additional 2 million TrinScrees HIV tests for the Kenya market. We expect to supply this in Q2, 2024. We receive this order in spite of another legal challenge against the Kenyan government, HIV testing algorithm, this time from the manufacture of a competitor product. We will be monitoring this case against the Kenyan government for any impact on orders for TrinScreen HIV for Kenya. But at this stage our focus is on delivering the quality tests that have been ordered by our customers to support the critically important HIV screening program in Kenya.

Outside of HIV we have continued to execute on our key change initiatives in our existing diabetes HbA1c testing group. We have now completed the development and testing of our new diabetes HbA1c Column System on time. As set out in today's press release, the results of this development program have exceeded expectations with our new Column System now delivering up to 4 times -- excuse me, the number of injections compared to the existing product. As planned we are now executing on the commercial launch of these new products. This new Column System is more convenient for many of our users and reduces our cost of goods to service these customers. We expect to see the financial benefits from this rollout to accrue from quarter two this year. We have also now completely brought in house the manufacturing process of our key diabetes HbA1c consumers and see startling any further product from our external provider.

Again this project has been delivered on time and as planned. Finally we are now using lower cost components in our Hemoglobin Instrument business. This is as a result of our supply chain optimization focus. These three initiatives are expected to deliver approximately $4 million of annualized savings and significantly benefit the profitability and value of our hemoglobin business. So, to sum up from me, a recent strategic acquisition gives us a foothold in a vast and rapidly expanding CGM market, into which we plan to introduce a highly competitive offer that we believe can successfully disrupt the market and capture significant value for our shareholders. We are pleased to be progressing on target with our initial plan for the business. Trinity Biotech, as I said, is an experienced diagnostic company that under new leadership and with fresh thinking can transform its existing business into a high-performing cash-generated enterprise, and we are very focused on executing on this plan.

With that, I will hand you over to Des Fitzgerald, our CFO, who will bring you through the financial results for Q4 and fiscal year 2023. Thank you for your time.

Des Fitzgerald : Thank you, John. I will now speak to our financial results for the four quarter of 2023. And following that, I will briefly discuss our full year 2023 financial results. Our revenues for the four quarter of 2023 were $13.4 million, compared to $15.7 million for the same quarter in 2022, a decline of $2.3 million. This movement was driven by, firstly, declines in our hemoglobins business of $1 million quarter-on-quarter, as we defer year-end shipments of products at suboptimal pricing as we renegotiate the contract terms, terms that are now agreed as of Q1, 2024. Secondly, a decline of $0.6 million, quarter-on-quarter in our autoimmune business, due to the already communicated ceasing of our transplant testing activity in our Buffalo Lab business, and thirdly, lower period-over-period revenue from our COVID-19 VTM products, leading to a decline of $0.2 million in that product segment.

Additionally, in our point of care business, we experienced a decline of $0.5 million, driven by lower sales in our Uni-Gold test, due to regular ordering patterns in that business. That decline is partially offset by revenue from our TrinScreen test of $0.4 million. This quarter was the first quarter we recorded revenue from our sales of our TrinScreen product to Africa, and we expect this test to be a key growth driver for us going forward. Our gross profit for the quarter was $4.6 million, representing a gross margin percentage of 34%, which was broadly in line with Q4, 2022. Other operating income decreased from $0.3 million in Q4, 2022 to zero in Q4, 2023. Other operating income in Q4, 2022 comprised government grants in relation to R&D activities, and there was no equivalent in the fourth quarter of 2022.

Research and development expenses were $1.1 million for the quarter in line with Q4, 2022. SG&A expenses were $6.9 million in the quarter, $2.8 million lower than the $9.7 million incurred in Q4, 2022. Key drivers of this reduction were a lower share-based payments expense of $2.3 million when compared to the same period in Q4, 2022, primarily due to the reversal of cumulative share-based payments expenses for unvested options related to our former CEO's resignation in this quarter. Additionally, included when SG&A spent this quarter was $1.8 million of non-product development legal, audit, and professional advisory fees. These fees were elevated in the quarter with the main driver being due to our acquisition of the CGM assets of Waveform in January 2024.

Our expected level of non-product development advisory, audit and consulting fees going forward is expected to be broadly a quarter of the Q4, 2023 level. We recognized an impairment charge of $0.3 million in Q4, 2022, which compared to a charge of $3 million in the same quarter last year. In the quarter, we recognized $0.3 million impairments across our cash-generating units, Immco and Trinity Biotech Do Brasil as their value in use was below their current value. We are seeking to implement profit initiatives in both units. All of the above led to an operating loss of $3.8 million in the quarter compared to $8.2 million in Q4, 2022, but the key drivers for the lower loss being lower impairment charges and lower SG&A expenses offset by lower revenue.

Financial income, representing movements in the derivative liability related to warrants granted to Perceptive Advisors our main lender for the period was $0.6 million compared to $0.3 million in Q4, 2022. Financial expenses in the fourth quarter of 2023 were $2.3 million compared to $2.4 million in Q4, 2022, with a slight decrease due to a lower principal amount over the quarter offset by higher prevailing interest rates. Loss before depreciation and amortization, impairments, tax interest and share option charges was $4 million for the quarter, basic loss per ADS of $71.8 compared to $132.3 in Q4, 2022. Our cash balance decreased from $6.3 million in Q3, 2023 to $3.7 million in Q4, 2023. Cash generated by operations was a positive $0.3 million in the quarter, in cases of net movement in their networking capital of $4.4 million.

In January 2024, the company entered into an amended credit agreement where it's existed with our existing main lender, Perceptive Advisors. Under the amended term loan and additional $22 million of funding was made available to us, with $12.5 million being used to acquire the Waveform assets. The remaining $9.5 million is available for general corporate purposes, including for the further development of the CGM of biosensor technologies. In addition, the loan provides for additional liquidity of up to $6.5 million that may be drawn down by us between April and December 2024, which can be used for general corporate purposes, again, providing further liquidity to fund the development of the CGM and biosensor technologies. The amended term loan, also immediately reduced the annual rate of interest on the loan by 2.5% to 8.75% plus the greater of the term Secured Overnight Financing Rate or SOFR or 4% per annum, and allows for a further 2.5% reduction in the base rate to 6.25% once the outstanding principal loan under the amended term loan falls below $35 million.

Additionally, the term loan reduced the early repayment penalty from a range of 8% to 7% down to 4% to 3.5% depending on the timing of early repayment and also reduced the revenue covenants. The amended term loan matures in January 2026. Now I will move on to the full year 2023 results and give a brief overview of the financial performance of the year. Revenue for the full year was $56.8 million, a decrease of an approximately 9% on revenues for 2022. The key drivers of the decrease were firstly lower COVID revenues of $1.8 million year-on-year as COVID testing programs scaled down. Secondly, lower autoimmune lab services revenues of $1.8 million as we lost the key transplant testing service contracts. And thirdly, declines in our hemoglobin business due to their predicted decline in sales related to our Ultra II instrument, and also, as discussed earlier, lower sales in the fourth quarter as we deferred shipment while we renegotiated contract terms with the key customers.

Gross margin for the year amounted to $19.5 million representing a gross margin percentage of 34.2%. This was 6.6% higher than 2022. This increase was due to a significant inventory obsolescence charge of $4.7 million that we experienced in Q3, 2022. Our SG&A selling, general and administrative expenses in FY’23 increased by $4.2 million to $31.2 million versus FY’22, an increase of nearly 16%. Significant elements of this increase relate to an increase of $1.6 million in technical advisory, legal and professional fees primarily due to the acquisition of the biosensor assets of Waveform, which was complex in nature as we turned up with an asset deal. Together with other corporate developments and corporate finance activities as we continue to assess our strategic opportunities and balance sheet optimization initiatives.

We also experienced higher FX losses largely related to the revaluation of euro-denominated lease liabilities. We experienced impairment charges of $11.1 million in FY’23, largely driven by an impairment to Immco due to the loss of revenue relating to the transplant testing activity together with a write down of our investments in imaware. Our operating loss for the year was $27 million. Our financial expenses for the year were $11.1 million compared to $24.7 million in FY’22, was the decreased primarily driven by two material items. Firstly, we experienced a loss of $9.7 million in FY’22 relating to the disposal of exchangeable notes, and secondly, we incurred a larger period-on-period earlier repayment penalty relating to a re-payment of the Perceptive term loan in FY’22 of $3.5 million versus a similar penalty of $0.9 million in FY’23 related to a smaller repayment during the financial year.

Profit from discontinued operations totals $12.9 million in FY’23, largely attributable to the gain of $12.7 million arising from the divestiture of Fitzgerald Industries. Loss on continuing operations before interest tax, depreciation and amortization, share-based payments and impairment charges was $12.1 million. Cash use by operations was $11.9 million in the year, inclusive of the negative net movement in working capital of $2.7 million. To finish, as CFO and as part of this new management team, I will reiterate that we are fully focused on the implementation and execution of the transformation plan that was laid out by John earlier in the call to transform Trinity into a hype forming, cash-generative enterprise, and I am excited to be part of this company as we plan to disrupt the rapidly expanding CGM market on the back of our recent strategic acquisition of Waveform.

Now I will hand you back to the operator for questions.

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