Good day, everyone, and welcome to the Trinity Biotech Third Quarter and Fiscal Year 2018 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded..

At this time, I would like to hand the conference over to Joe Diaz of Lytham Partners. Please go ahead, sir. .

Thank you, Denise, and thanks, all of you, for joining us to review the financial results of Trinity Biotech for the third quarter of 2018, which ended September 30, 2018. With us on the call representing the company are Ronan O'Caoimh, Chief Executive Officer; and Kevin Tansley, Chief Financial Officer.

At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session..

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The word believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements.

Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts; the effect of regulation by the United States Food and Drug Administration and other agencies; the impact of competitive products, product development commercialization and technological difficulties; and other risks detailed in the company's periodic reports filed with the Security and Exchange Commission.

Forward-looking statements reflect management's analysis only as of today. The company undertakes no obligation to publicly release the results of any revision for those forward-looking statements..

With that said, let me turn the call over to Kevin Tansley, Chief Financial Officer, for a review of the results. After Kevin's remarks, we will hear from Ronan O'Caoimh on his review of the quarter, after which we will open the call for your questions. .

Kevin?.

Thanks very much, Joe. Today, I will take you through the financial results for quarter 3 2018. .

Beginning with our revenues. Our total revenues for quarter 3 were $23.7 million, which compares to $25.6 million in quarter 3 of 2017. As Ronan will discuss more details on these revenues later on the call, I will now discuss the rest of the income statement..

Our gross margin this quarter was 42.1%, which compares to 43% for the same quarter last year. There are a number of factors which led to this reduction. Firstly, our revenues were lower.

As I've mentioned before, this tends to have a negative impact on our margins as our cost base is largely fixed and, hence, is being spread over a smaller volume of sales. Also, a lot of the reduction in revenues this quarter related to African HIV sales, which, by their nature, have higher margins.

Meanwhile, currency movements, particularly the sharp decline in the Brazilian real during the quarter, was a significant factor also. Thankfully, we witnessed a significant recovery in the real this quarter since September 30. So hopefully, this will not be as much of a factor going forward..

I would like to point out that despite this decline which is -- which will, by the way, would have been a lot more significant both for the cost savings that we introduced this year, gross margins this year are currently running 50 basis points higher than -- this year than last year year-to-date..

Moving on to our indirect costs. Our R&D expenses during the quarter fell from $1.5 million to $1.3 million. Meanwhile, our SG&A expenses also decreased, in this case, from $7.8 million to $7.1 million. Again, you are seeing the impact of the cost savings at play.

Another factor which has contributed to the reduction has been the recognition of a gain of approximately $400,000 arising on our loan note repurchase.

You would have seen from the release that during the quarter, we bought back 15.1 million of notes for just over $12 million in cash, which obviously resulted in savings to the company of $3.1 million. .

Not unreasonably, you may be wondering why the gain on this transaction in the income statement does not also amount to $3.1 million. And the reason for this is due to the accounting rules associated with hybrid financial instruments like our notes whereby we carry these notes on our balance sheet at a value which is lower than their nominal amount.

This gets corrected over time by charging an additional noncash or notional interest amount through the income statement, which, over time, builds the value of the notes back up to the nominal amount. In our case, this is a charge of about $200,000 per quarter..

Moving back then to the income statement. Operating profit for the quarter was $1.2 million compared to $1.5 million in quarter 3 2017. This reduction is due to the impact of the lower gross margins and lower revenues I mentioned earlier that was partly offset by the reduction in indirect costs..

Moving on to our financing costs. Our financial income for the quarter was $175,000, which is a little lower than in the comparative period due to a lower level of cash deposits. Meanwhile, our financial expenses fell from $1.2 million to under $1.1 million.

This reduction of $100,000 was caused by the repurchase of the notes in early August, thus leading to a 2-month interest saving on those notes this quarter. Next quarter, you'll see the full reduction of $150,000, which equates to an annual saving of $600,000..

Meanwhile, the noncash financial income, which has been separately disclosed further down the income statement, was a gain of $600,000 this quarter.

Again, this relates entirely to our exchangeable notes and consists of a gain of $800,000 due to a reduction in the fair value of the derivatives embedded in the notes partly offset by noncash interest charge of approximately $200,000 that I mentioned earlier.

Tax charge for the quarter was $76,000, and this represents a nominal effective tax rate of 6.1%, which is a little lower than normal..

On an overall basis, the profit after tax for the quarter was just under $900,000 compared with $400,000 last year. However, excluding noncash items, the profit for this quarter was over $300,000 versus $500,000 in quarter 3 last year. And this equates to an EPS of $0.013 versus $0.024 last year.

Meanwhile, fully diluted EPS is $0.051, down from $0.063. Obviously, the reduction in the EPS is due to the impact of the revenue and gross margin factors that I mentioned earlier..

Finally, on the income statement, earning before -- earnings before interest, tax, depreciation, amortization and share option expense for the quarter amounted to $2.8 million..

I will now move on and talk about the significant balance sheet movements since the end of June. Property, plant and equipment increased by $2.3 million, and this is due to additions of $2.7 million, being offset by depreciation of $400,000 and FX movements of $100,000.

The level of additions were higher than normal this quarter due to fit-out costs in relation to our new facility in Buffalo, which I mentioned on the last call. In the same period, our intangible assets increased by $1.5 million. This is made up of additions of $2.3 million, offset by amortization charges of $800,000..

Moving on to inventories. You will see these have decreased by approximately $1.9 million to $32.9 million. This follows a similar pattern to all the years when inventory levels have tended to fall in quarter 3 due to seasonal factors principally surrounding the Lyme season..

Meanwhile, trade and other receivables have increased slightly -- to slightly under -- to $23.4 million from $23.1 million in June. Our trade and other payables also increased slightly to $21.1 million, and that includes both current and noncurrent payables..

Moving on to our cash flows for the quarter. Cash generated from operations was just over (sic) [ under ] $3 million. This was partly offset by changes in the working capital of $500,000.

Capital expenditure in the quarter was $4.3 million versus $3.7 million last year with the increase attributable to higher capital expenditure on our Buffalo facility..

The other cash flow movements in the quarter both relates to our exchangeable notes. Firstly, there was the repurchase payment of $12 million, and then there was an interest payment of $200,000.

Normally, there are no interest payments on the notes in quarter 3 but, in this case, related to the interest which had accrued on the purchased notes up to the date of the repurchase. This has resulted in cash balance at the end of September of $35.7 million..

I'll now hand over to Ronan. .

Yes. Thanks, Kevin. I'm now going to review our revenues for quarter 3 before opening the call to a question-and-answer session..

Our revenues for quarter 3 were $23.7 million compared with $25.6 million in the corresponding quarter last year, which is a reduction of 7%. Point-of-Care revenues were $3 million compared with $4.6 million in the corresponding quarter last year, which is a decrease of 35%. Our U.S.

HIV revenues decreased by 7%, and this is explained by the fact that public health spending in the U.S. on HIV testing continues to decrease..

We had a really poor quarter in Africa with sales down 38% compared with the prior year quarter. The decrease is accentuated by the fact that quarter 3 of 2017 was the strongest quarter for HIV African sales that we had over a 3-year period.

We believe that the weak sales during the quarter do not reflect a loss of market share or a diminution in the size of the market but rather reflect the haphazard nature of NGO ordering patterns..

Meanwhile, Clinical Laboratory sales for the quarter were $20.7 million compared with $21 million in the corresponding quarter, which is a decrease of 1.4%. However, as Kevin said, if you exclude the impact of adverse currency movements, primarily the weak Brazilian real, quarter 3 Clinical Laboratory revenues would have increased by 0.4%..

In Infectious Disease, our revenues declined 17% compared to the corresponding quarter last year. Approximately 25% or 1/4 of this reduction is explained by the gradual decline of our U.S.

ELISA Infectious Disease business as the 5 biggest diagnostic companies continue to add more and more of our product offering onto the menu of their large immunoassay instruments. However, 75% or 3/4 of the total decline in our Infectious Disease business arises due to the loss of the significant Lyme confirmatory Western Blot contract with a U.S.

customer. The annualized value of this lost contract is $2.1 million, and the revenue impact during this quarter under review, which is the summer quarter, was $850,000. The annualized negative P&L impact is $600,000..

Over the past 15 years, Trinity has held effectively 100% of the Lyme confirmatory market in the United States through our Western Blot products. However, in the past few years, an alternative more automatable technology has emerged called line immunoassay, or LIA, for the confirmation of Lyme samples.

Trinity Biotech has developed and received FDA approval for a line immunoassay, or LIA, Lyme confirmatory product over the past few years..

However, in addition to us, 2 other companies have received similar FDA approvals. One of our large U.S. customers who has been purchasing our line -- our Lyme Western Blot confirmatory test for the past 15 years decided to move to the alternative technology primarily because of it being more automatable.

And in the competition with the alternative suppliers where pricing was very competitive, regrettably, we lost the contract..

Moving on to autoimmunity. This business performed really well during the quarter with a 7% revenue increase. The reference laboratory business performed strongly, and we continue to grow all facets of the business but particularly the business with the 2 U.S. mega labs..

Our -- on the product revenue side of our autoimmune business, our strategy has been to grow our best-in-class immunofluorescence product revenues around the world while also growing our enzyme immunoassay product revenues around the world but particular in emerging markets while meanwhile developing our new automated and integrated immunofluorescence processor and reader, which will eliminate the requirements for the use of microscopes with our IFA product range.

This strategy is working successfully for us, and we have had significant success in the past number of quarters in China with our immunofluorescence product range..

Moving on to our diabetes and hemoglobin variant business. This business performed really strongly during the quarter with a revenue increase of 11% when compared with the comparable quarter.

We experienced strong instrument placement in China and in Europe and are now beginning to reap the benefits of the employment of 3 additional international sales reps earlier in the year. These sales reps are beginning to open up new markets for us.

And as examples, we are placing 12 Premier instruments into South Africa, 10 Premiers into Pakistan and 4 into Romania during the current quarter. These are new previously untapped markets for us..

Meanwhile, our Premier resolution instrument, which serves the hemoglobin variant market for sickle cell anemia and thalassemia has performed strongly. This is a high-value market with few competitors, and we believe that with our best-in-class instruments that we can take a significant market share.

Over the past year, we have been very successful in placing instruments in Europe, but we anticipate receiving FDA approval for this instrument before year-end. And this will open a very significant U.S. neonatal and variant markets to us..

Meanwhile, the launch of our new hemoglobin point-of-care instrument and test, which we call TRIstat, adds a significant new business opportunity in our hemoglobin business. Having received FDA approval for the product and the instrument, we are now pursuing Chinese and Brazilian approvals.

By the end of this year, we expect to have placed 150 instruments around the world, and we anticipate significant success with this product, which we believe will quickly grow to constitute a significant percentage of our overall hemoglobin revenue base..

So going to hand back for a question-and-answer session. .

[Operator Instructions] And the first question will be from Jim Sidoti of Sidoti & Company. .

Can you hear me?.

Yes, Jim. Yes. .

Good. Good. So you talked about some significant investments in capital expenditure, plant, property and equipment in the quarter, and you mentioned the facility in Buffalo. I think you said you invested about $2.7 million.

Can you just remind me what that was for and what do you expect to happen from those investments? How do you expect to recoup those investments over the next couple of years?.

Yes. Kevin here. The amounts of investments are not -- they're nowhere close to $2.7 million on those investments. Basically, the accounting for the increase in the increase -- it increased in capital expenditure this quarter. So it's about $0.75 million. And what we're doing there is we are expanding our laboratory footprint.

Since we acquired the business a number of years ago, the laboratory business had been very growing very steadily. We basically maxed out in terms of where -- in our existing premises.

We have moved to newer premises, which gives us now space to continue that level of expansion going forward and also gives us additional space in which to grow our product, i.e., the manufacturing side of the business as well as we put a lot of emphasis on that in the years ahead. So basically, what we're doing here is we're investing for expansion. .

I mean, I think, Jim, when we bought that business, it was doing $12.5 million; it's now doing $20 million. So we just basically run out of space. .

Okay.

And you expect that growth to continue then in '19 and '20?.

Absolutely. I mean, we believe that it will accelerate. I mean, I think in the current quarter, we did 7%, and we've been doing approximately 7% or 8% over the past year. We were more than that, I think, in the previous 2 years.

But I think we believe, particularly with the advent of the new integrated processor and reader for immunofluorescence, we believe that can be transformational. And yes, so we believe we can grow this business well into the double digits. .

Okay. And then on the last call, you talked about the release of the new reader and the new confirmatory -- the new screening test for HIV in Africa. And you indicated that you thought that would get you back to at least mid-single-digit growth by 2019.

Do you still think that those are realistic goals?.

Yes, we do. I mean, just to recap on what we're doing, I mean, we have been having -- we, up to now, have been manufacturing our HIV product -- our existing HIV confirmatory product in China. And we're now moving that -- we have now moved that to Ireland with a significant cost saving.

But in addition to that, we take possession of and take control of manufacturing. But beyond that, we are not just -- we don't intend only manufacturing our existing confirmatory test, but we intend, for the first time, entering into the screening market, which, by definition, is probably 10, 12x bigger than the confirmatory market.

So to remind ourselves, Trinity Biotech has dominated and continues to dominate the confirmatory market in Africa. And then Abbott dominates the screening market, running probably 130 million tests annually, them alone, and the total market maybe being bigger than that. And now for the first time, we're entering that market.

So we developed a new test called Trin-Screen. It's been developed down in San Diego, and it's been transferred back to Ireland. It is well on its way to WHO independent trials and will then be -- will be submitted to WHO.

And we hope that, that product will be WHO approved, manufactured in Ireland at a very reasonable cost of about $0.35 and available to enter into the African market, the screening market for the first time in -- hopefully depending on the timing of WHO audit, et cetera, by quarter 3 of '19, of next year.

And we have basically built up our sales team, and we have taken some of them. Alere/Abbot's management team, indeed, the head of their operation.

And armed with our reputation for excellence, our dominance of the confirmatory market over the virtual generation, with an excellent new product, with an entirely different recombinant and armed, for the first time, with serious pricing capabilities based on a very efficient automated manufacturing plant here.

With the personnel we have on board, we believe that we could take significant market share so that we can operate in both the screening and the confirmatory markets with 2 totally separate products, different products. .

So just to be clear, you still think you can return to growth by 2019 even though you lost that contract for the Lyme confirmatory test here in the U.S.?.

Yes, I do -- we do believe so. Absolutely. .

Okay. And then with regards to cash flow. If you didn't spend the money to buy back the notes in the quarter, you actually would have generated cash in the quarter.

Do you think you have turned the corner there?.

We think, overall, we have.

I think we -- I did mention on the last call that we have a number of residual issues to sort out between now and the end of the year one of the fit-out costs in relation to both of the couple of other items arising at a litigation, which we had brought up in the past, which are being paid out in the second half of this year.

We obviously have a note interest payment to be -- to make. Well, actually, physically, we have made it already, but it falls in quarter 4. That will be $2 million. So once we get through that point whereby we clear out those residual issues, we believe in 2019, for 2019 as a whole, we'll be cash flow neutral, if not better.

And that's been achieved by virtue of the fact that we have implemented significant savings, which we outlined in more detail last quarter. And also the sort of initiatives, we just referred to there as well. Ronan referred to them in relation to the HIV economies, which will accrue to us next year as well. .

I think it was in the circumstance of being confident of having reached a cash flow breakeven situation that we had the confidence to go out and buy $15.1 million of the note. .

Okay. And then the last one for me is you indicated last quarter that you thought you were on track for about $3 million in cost savings annually.

Do you still think that that's a realistic number?.

Yes, I do. I mean, if you look at the -- if you look at our R&D costs, they were down. If you look at our SG&A costs, they're down, albeit that was helped by the gain on the repurchase, and also, there was a help in relation to our gross margin this quarter. So the approximate gain this quarter is probably about $700,000.

There were some costs associated with implementing those costs during this quarter. So come quarter 4, we will see the full benefits, which is $3 million a year or $750,000 on average per quarter. .

[Operator Instructions] The next question will come from Matt Reiner of Adirondack Funds. .

Can you -- on the Lyme customer that you lost, I think you said it was roughly $2.1 million, and I think you said $850,000 impact this quarter.

Is -- was this the first quarter that it impacted you?.

Yes. Yes, it was. It -- yes, we just lost a contract at basically the start of the quarter. That one is... .

So that -- I mean, that's about 40% of the $2.1 million. So the -- how would we look at -- how does that roll out to the next... .

Well, because of the fact that Lyme is a seasonal business, typically, quarter 2 and 3 would be the big quarters. So -- but just -- I mean, you have something like 35%, 35%, 15% and 15% in quarter 2, 3, 4 and 1, if you know what I mean. 35%, 35%, 15%, 15%, something like that.

Basically -- so the December quarter is a quiet quarter for Lyme, as you can imagine, and so would quarter 1 be. So you got to take most of the hit in quarter 2 and 3. .

Okay. So next year, in Q2 of '19, you'll have a little bit of a hit from that not being there anymore.

Is that correct?.

Yes. I mean, if I had to guess, let's say the impact is going to be something like $350,000 in quarter 4, $350,000 in quarter 1, $700,000 or something in quarter 2 and then $800,000 in quarter 3 -- I don't know if that adds up to $2.1 million but approximately something like that.

I think another thing to note is that the adverse P&L impact might not have been quite as large as you would have expected. It doesn't seem to be consistent with our gross margin. And that just reflects probably the pricing -- the purchasing power of -- that can be present in a situation like that, if you know what I mean. .

Yes, that -- okay. So it wasn't a great margin business, to begin with. .

It's still very tight. You lose it, but yes. .

Yes. Okay. And then if -- the -- oh, the other question. On the U.S. HIV spending cuts, like how -- I mean, because -- I mean, your -- the Point-of-Care business used to be $19 million, $20 million a few years ago. Now it's $16 million, $17 million, and this year, it looks like it will probably be $14 million or $15 million.

It looks like it's down quite a bit this year. Is -- and it seems like it's mostly been U.S. that's hurting you. So can you tell us or show us or give us a little more color on how much U.S.

HIV has changed in the last few years as far as spending in there?.

Well, I mean, the HIV -- the point-of-care HIV market in the U.S. is primarily a public health market. So traditionally, it's been -- and still, it's dominated by OraSure who have saliva test. But it's primarily public health dollars, and basically, it's just the last being spent. The public health segment is just -- it's declining.

And I think if you look at -- I don't -- if you look at our competitors' numbers, you'll see that as well. It just continues to decline and -- which is -- in some way, it is surprising because given that HIV is no longer a killer.

And if you pick up the HIV positive at the right time and you put people on antiretroviral treatment, they can live normal life spans. So you would have expected actually, if anything, that the market ought to increase, but it -- that hasn't happened. .

But -- so I guess -- I guess, what I'm trying to get at is when I look at that business is the new reality, is that more of a $15 million to $16 million type a year business as opposed to what it used to be?.

Well, it is at this moment in time. But bear in mind, I spoke a few moments ago about our new Trin-Screen products entering the African screening market. And I think that can make... .

And that will go -- all right.

So that will be in the same segment, but it's a new avenue?.

Yes. And just to remind you, we can manufacture that product in Ireland at a cost of about $0.35. The market is actually at $0.85. That's where the pricing is at. And we can compete with an entirely new -- totally different product, completely differentiated from our confirmatory market -- our confirmatory test, and it's very big.

But logically, it's 12x, 13x the size of this -- of the confirmatory market albeit at a lower price. But with the manufacturing capability we now have, we can confidently enter that market. Just to mention, too, the trials are going extremely well. We are very satisfied that we have a super product. I don't think you'd be surprised at that.

I mean, we have -- we're experts in this area. .

Okay. And then on the -- you used to kind of give breakouts of, like, the premier instruments that you had placed. But can you kind of give us an idea of, like, how many are placed now versus... .

Sorry, I -- yes, I just thought, as I was going through, I realized I haven't said it yet. 75 this quarter. .

Okay.

75, this -- and then -- so how many are -- do you have, like, a total of what's out in the market in total?.

We have gone over -- as of the end, I think, of quarter 1, we actually had about 2,000 that are actually left our factory door. Now that doesn't mean that all of those are actually in the market running. Some people will hold them in inventory. Some of them are actually running demos on them or what have you.

So it was about 2,000 of that, so about 20 -- between 2,100, 2,200 at this point. .

Okay.

And then from the time when people start demoing to when they actually start going into production, is it -- what is it -- can you give us a rough idea what -- how long that usually takes?.

3 or 4 months. I mean, it would depend. I think an instrument that goes to China, it probably takes longer to end up in actually working in a lab because -- or in a hospital because they go through a distributor. But I think on average, 4 months would be reasonable to say. .

Okay. And then as far as the -- what do I want to say, the reorders on supplies for those instruments, I mean, is that living up to expectations, I mean, as far as how many we're seeing you have placed? And is there, like, a steady predictability to how often they have to get the... .

Yes. I think all of -- I think in terms of the amount of queues that's running on our instrument, it's more or less in line with our expectations. The only country, I think, where the -- we're behind our expectations and our hopes would -- is China. But I think that's improving.

So the number of testing run per Chinese instrument is increasing at about 15% annually. So -- and that really -- that kind of growth level has really emerged in about the last year. So we're very encouraged by what we're seeing there.

And then -- and that reflects the fact that GPs, or general practitioners, in China are -- many of them aren't really aware they will -- aren't very able and be aware. So the governments are backing the programs that's full reimbursement. But just the local doctor needs to be educated as to the benefits of it and certainly the older doctors.

And that's a bit of a problem in China. .

Okay.

And then last for me is just on the -- as far as your uses for cash or if you stay cash flow positive, are you between deciding to buy back the exchangeable notes or buy back stock? Or what's your -- how are you making that decision? Or what's kind of behind your thoughts on that?.

Well, I mean, I think that -- I just made the point. We bought back $15 million of the notes. We bought it just from $115 million down to $99.9 million. And certainly, we only did that against the back on the cash flow that we had -- we just had just over just about on cusp of reaching cash flow breakeven.

And -- but I do think moving forward that we'd be cognizant of the fact that our cash balance isn't months or so. I think we'd be relatively conservative in what we would do. Not saying we wouldn't do anymore, but we could assume we'd be fairly conservative on the -- there, but I am. .

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Ronan O'Caoimh for his closing remarks. .

Well then, thank you very much, indeed, and we look forward to speaking to you at the next conference call. And goodbye, and good afternoon. .

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines..