Ronan O'Caoimh - Chief Executive Officer Kevin Tansley - Chief Financial Officer Joe Diaz - Lytham Partners.

Good day, and welcome to the Trinity Biotech, Second Quarter Fiscal Year 2019 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 Mr. Joe Diaz. Please go ahead..

Thank you, Shawn, and thank all of you for joining us to review the financial results of Trinity Biotech for the second quarter of calendar year 2019, which ended June 30, 2019. 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. But before we begin with those 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 Securities 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 to these 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'll open the call for your questions.

Kevin?.

Thanks very much Joe. Today I’ll take you through the results for quarter two 2019. Beginning with our revenues, total revenues for the quarter were $22.5 million, which represents a decrease of approximately $2.5 million versus quarter two last year. Ronan will provide more details on these revenues later in the call.

In the meantime I will move on and discuss the other aspects of the income statement. Our gross margin for the quarter was 42%, which was broadly consistent with the first quarter of this year, however when compared to quarter two 2018 it is 1.2% lower.

As you would have heard me mention before, due to the highly fixed nature of our cost base, our margins are very sensitive to revenue fluctuations. I should also say that we were impacted by the fact that the principal decrease in revenues this quarter rose largely in the HIV sector, which is one of our more profitable product lines.

In addition, currency movements in the quarter, particular with regards to the Brazilian real were also a drag on margins. Moving next to our indirect costs, in total they have fallen by over $800,000 in the quarter to $8.3 million.

Within this, you were seeing relatively flat R&D expenses of $1.4 million while SG&A expenses decreased by over $700,000 to $6.6 million due to our continued emphasis on cost control. Meanwhile, our share option expense also decreased from $300,000 to $200,000.

The net result of all this has been a decrease in operating profit from $1.7 million to $1.2 million and a decrease of $500,000, and just to break that down, the lower revenues and gross margin caused our gross profit to fall by $1.4 million that we made back over $800,000 of this than through lower indirect costs.

Moving on to our financing costs, which includes the impact of our exchangeable notes. Our financial income for the quarter was $133,000 versus $196,000 in the comparative period. This is primary due to the lower levels of cash and deposits.

Financial expenses of $1.2 million for the quarter, of this $1 million relates to the cash interest element of the exchangeable notes, for which the equivalent figure in quarter 2, 2018 was $1.15 million. The reduction being due to the note repurchase we made last year.

The remaining $200,000 relates to the additional financing charge element of lease payments as a result of the new accounting standard for leases IFRS 16, which I discussed at length on the last call.

Then there is the noncash financial income of $150,000, which is disclosed further down the income statement, and that also relates to our exchangeable notes with noncash interest of approximately $160,000 being offset by a gain of over $300,000 recorded for the change in the fair value of the derivatives embedded in the notes.

Moving on to our tax charge, which you will see from the release amounts to $5.7 million. Of this, $147,000 is the normal tax charge for the quarter and represents an effective tax rate of 12% of operating profits.

In addition, there is also a once-off tax charge of approximately $5.5 million in respect of a tax audit carried out in one of the company’s subsidiaries. This charge relates to a payment due in respect of historic payroll taxes over a multi-year period and has been agreed with the relevant tax authority.

Net result is a loss for the quarter of $5.4 million, of excluding non-cash items under once-off tax charge that I just mentioned, the company is approximately breakeven for the quarter. This is on the equation then on a diluted EPS basis of $0.037.

Finally on the income statement, earnings before interest tax depreciation amortization and share option expense for the quarter was $2.9 million. When I move on and talk about the significant balance sheet movements since the end of March 2019, there is a reduction in property plans and equipment of $300,000.

Additions in the quarter were at $500,000 and then this was more than offset by depreciation charges of $800,000. In the same period our intangible assets increased by $1.7 million and in this case it was made up of additions of $2.4 million, partially offset by amortization of $700,000.

Moving on to our inventories, you will see these have increased by 1.8% or $500,000 and that would stand at $31.5 million. The small percentage increase is mainly due to timing factors, primarily higher instrument related inventory in order to fill expected strong demand in the second half of the year.

Meanwhile in trading other receivables have increased by almost $800,000 to $24.3 million, just broadly in line with higher sequential revenues. Trade and other payables, which includes both current and non-payables have decreased by $1.8 million to $36.8 million.

$1 million of this decrease relates to the interest on exchangeable note, as we made a biannual interest payment of $2 million during the quarter and then accrued an additional quarter of interest of $1 million. The remaining reduction of trade and other payables mainly relates to lower lease liabilities due to payments made during the quarter.

Finally, I will disclose our cash flows for the quarter. Cash generated from operations for the quarter was $1.5 million compared to $1.7 million during the equivalent quarter last year, whilst capital expenditure in the quarter was $3.1 million, which is $800,000 lower than the corresponding quarter last year.

Next, we have the lease payments of $800,000, which arise on leases which have been capitalized in 20019 due to the adoption of IFRS 16 and then there was an exchangeable note interest payment of $2 million, which is $300,000 lower than the corresponding quarter last year due to the partial note buy back.

The net result is that we had a decrease in cash for the quarter of approximately $4.4 million, bringing the quarter end balance to $25 million. I will now hand over to Ronan. .

Thank you. I'm going to review our revenues for quarter two before opening the call to a question-and-answer session. Our revenues for quarter two were $22.5 million compared to $25 million in the corresponding quarter last year, which is a decrease of 10%.

Point-of-Care revenues were $2.1 million compared with $4 million in the corresponding quarter last year, which is a decrease of 47%. Clinical Laboratory revenues were $20.4 million compared with $21 million in the corresponding quarter last year, which is a decrease of 3%.

Moving back to Point-of-Care, our revenues decreased this quarter by 47% when compared to the corresponding quarter.

Our African HIV revenues decreased to 51% when compared with the corresponding quarter, and this is explained both by the haphazard nature of ordering patterns which characterizes this market, and also by the fact that the number of quarter two orders were collected by a number of customer carriers in the early days of quarter three.

Given that we've neither gained nor lost any contract over the past 12 months and there have been no changes that have affected us relating to national algorithms, we expect that our 2019 African HIV revenues would be broadly in line with 2018. Meanwhile our U.S.

HIV revenue decreased by 12% and this is explained by the fact that public health spending in the U.S. on HIV testing continues to decrease. Meanwhile as previously indicated, we have developed a HIV screening product called Trin-Screen, which we anticipate it will be launched on the African market in the first half of next year.

Given the quality of the product and given the price at which we can now manufacture the product in our new automated plant in Ireland and given our long reputation as a manufacture of gold standards, we believe that we can take significant market share in the screening segment of the African HIV market, which comprises 170 million tests annually and is many times greater than the confirmatory market in which we now operate.

Our new Trin-Screen product is currently undergoing independent trials in Africa to support a WHO submission and it is anticipated that the product will be submitted to the WHO by year end.

Given that we now have a high volume, low cost manufacturing facility in Dublin, we believe that this new product will transform our HIV business into a strong growth engine in future. Moving on to our Clinical Laboratory business, our revenues for the quarter were $20.4 million, which is a decrease of 3% over the corresponding quarter last year.

During the quarter we suffered a currency headwind, which amounted to $400,000, and the biggest component of this is explained by the weakening of the Brazilian real, which moved from BRL3.25 last year to current rate of BRL4. Our infectious disease business decreased 15% year-on-year.

Our mainline infectious disease business decreased 5% when compared with the prior quarter, and as we have signaled in the past, this is in line with our expectations given the ongoing migration by laboratories from ELISA onto random-access platforms in the United States.

However, additionally as previous announced, during the year we also suffered a loss of a significant Lyme confirmatory contract with one of the major clinical laboratory services in the U.S.A and this loss which appropriates to $2.1 million annually gave rise to a 9% decrease in our infectious disease revenues in this quarter when compared to the corresponding quarter last year.

On an ongoing basis, we expect shrinkage of our infectious disease business to be approximately 5% annually, given that the other segments of the business have performed well, particularly in China.

Meanwhile our Diabetes and Hemoglobin variant business had a very strong quarter with revenue growth of 16% when compared with the corresponding quarter last year. Instrument placements were 62 and we believe that we will comfortably place more than 300 instruments during 2019.

It’s important to bear in mind that every instrument we place is new business and that we are never replacing existing Trinity instrument as we are in the middle years of the placement cycle.

Meanwhile, our premier resolution instruments which serve the hemoglobin variant market for sickle cell anemia and thalassemia performed well in Europe, while we expect to receive FDA approval for our premier resolution from the FDA in the first half of next year. Receipt of FDA approval will enable us to enter the U.S.

market, but it will also enable to commence into the Chinese regulatory process. These are high-value markets with few competitors and we believe that with our best-in-class instrument and reagent, that we can take significant market share.

Meanwhile, the launch of our new hemoglobin Point-of-Care instrument with TRIstat adds a significant new business opportunity to our hemoglobin’s business.

We expect to place between 400 and 500 instruments around the world during 2019 and expect that this level of placement will be significantly exceeded upon the receipt of Chinese approval, which is expected by the middle of next year.

We anticipate significant success with this product, which we believe will quickly grow to constitute a significant percentage of our overall hemoglobin revenue base. Meanwhile, our Autoimmune business grew 7% this quarter when compared to the corresponding quarter last year.

The specialist reference laboratory business performed well with significant growth coming from our Sjogren test range and from the growth of our business with the two U.S. mega labs.

On the product revenue side of our Autoimmune business, our strategy is to grow our best-in-class immunofluorescence product revenues, while also growing our enzyme immunoassay product revenues around the world, particularly in the emerging markets, while meanwhile developing our new automated, integrated immunofluorescence processor and reader, which will largely eliminate the requirement for the use of microscopes with our IFA product range.

This strategy is working successfully for us, and we’ve had significant success in China with our IFA product range. At this point today, if I could hand it back then for question-and-answer session..

Thank you. [Operator Instructions] Our first question today will comes from Jim Sidoti with Sidoti & Company. Please go ahead. .

Good afternoon, gentlemen.

Can you hear me?.

Hi Jim, how are you?.

Good, good! Just can we go over timing on a couple of the new products. TrinScreen, I think I heard you say you expect to submit that to the WHO by year end.

So is that something you expect to have approval for in the first half of 2020?.

It’s difficult to be talking about that, but we will hope that that we could turn it within six months, yes. And just to say that there have been delays in terms of the trial which you know, the trial sites are South Africa, Kenya Ivory Coast.

There were some delays in terms of finalizing validation batches etcetera, but we are confident of the timelines we’ve just outlined. .

Okay, so submitting by 2020 and then it's kind of up in the air when you get the approval..

Yes, submitting is by end, and then yeah, hopefully we get it through four, five, six months, but we are not in control of that. .

Okay, how about – you would talk on past because about manufacturing premiere in Brazil.

What's the timeline for that?.

Okay, well that's actually – I'm glad to tell you that that's up and running. We are now manufacturing in Brazil.

We have had all the approvals and it's happening, it's live and actually just while I’m saying it, we just won a contract for 4 million tests in Brazil and we are able to take on that business even at the appointed real to the dollar rate, which I think is just a run out at this moment of time.

But then given that we are manufacturing there and we were matching our costs with our revenues in real’s, we are able to take that on. .

Okay, and then the Hemoglobin variant version, is that submitted or is that still to be submitted to the FDA?.

Well, it was submitted and the FDA came back with more queries and so we are basically resubmitting that. We are just about to resubmit and we think the resubmission will go – so basically the FDA came back with questions, with questions to the extent that you can call the strategy a resubmission.

So we are making the resubmission in the next six to eight weeks. We expect it will definitely be in by 1 October and then – so then hopefully we get approval in three months, but just to be safe I’m saying first half of 2020. .

Okay, and then the automated slide reader, what was the status of that? Is that going to be [Cross Talk].

Well that’s progressing very, very well. But I mean that’s longer, that’s out and towards the end of 2021. .

Okay. Alright, and so overall though, now that you have Premier up and running in Brazil, it sounds like you've had some timing issues with the African business.

Is it safe to assume that revenue in the back half of ‘19 will be higher than revenue in the front half was?.

Yeah, solidly higher, yeah absolutely, yeah. Maybe we got caught by some timing issues there at the end of June which started to make this quarter look really weak, but quarter three and four for HIV will be much, much stronger.

And as I indicated, I believe that our overall revenues for the year in terms of HIV in Africa will be broadly in line, maybe somewhat behind, but broadly in line with 2018. .

Okay. Alright, and then in terms of cash, I know you have one more, it sounds like you have one more tax payment to make this year.

Are there any other big payments due in 2019?.

So with – we had a tax payment that we have to make and that's the only non-normal payments that we have to make in terms of large payments. Well we obviously have our second by annual interest payment in quarter four. .

Okay, so….

Should be $2 million, which you will be familiar with that every six months that comes, so every second quarter. .

So do you think that – when do you think cash will start to grow on the balance sheet.

Is that something that – bottom half this year?.

Yes, so I mean you heard Ronan mention the facts – yeah, so Ronan has mentioned the fact as we expect that the second half of the year will be a lot stronger. And as you would have known in terms of our profitability, but then consequently in terms are cash, it's very much influenced by the top line.

So we're very much targeting being cash flow break even for the second half of the year. But that depends on the revenues and to the extent we should get those revenues, be cash flow breakeven for the second half of the year and may also even exceed depending on how strong the revenues are.

Obviously that's without taking into account the tax payment which is yet to be made and which will fall into the second half of the year. .

But that does account for the interest payments. .

That’s what’s happened. .

Okay, alright thank you. That is it from me. .

Thanks Jim..

Thanks Jim. .

Our next question will come from William Lap a Private Investor. Please go ahead. .

Good morning Ronan and Kevin, I just have one question and I’m limited as a shareholder, but how did you miss $5.4 million in this tax problem with the payroll? How did that occur?.

Yeah, so we were subjected to a routine tax audit in one of our subsidiaries and that covered about a 10 year periods, and a part of that or as a tax liability in relation to payroll taxes was identified. It was quite technical in nature.

We have strong arguments in relation to the approach with the adopters and consequently both ourselves and the tax authority in question reached a negotiated settlement and that broadly approximates to about $500,000 per year when you take into account the interests that will obviously apply it to as well. .

But wasn’t our statute of limitations like six years on some of that?.

There are different statutes of limitations and depending where you operate. .

So this is a U.S.

subsidiary?.

At this point we're not disclosing in which particular jurisdiction that will be encouraged given we have reached a settlement with the respective tax authority. .

Okay, thank you. That's all my questions. .

Thanks Bill..

Our next question will come from Jonathan Sacks with Stonehill Capital. Please go ahead..

One, explain the move, the change in cash balance; and second, can you explain the timing of the payments under the tax settlement and have we made any of those payments yet or did that $5 million cash outflow that is still yet to come?.

Essentially – to take the second part first, essentially that'll be paid. I expect it'll be paid in quarter three or could drift into quarter four, plus it has not been reflected yet. So you'll see us either all in quarter three or all in quarter four. It won't be phased as such.

Going back then to the movements this quarter, every second quarter we will have an interest payment. So we didn't have one in quarter one. We had one in quarter two and that takes into account six months of interest. So quarters two and four are always going to be heavier from a cash burn perspective.

So you are seeing $2 million of the reduction arose due to interest of which half basically refers to the period in question.

In terms of the other major movements, we would have had CapEx of approximately just over $3 million which is down from about $3.8 million in the previous quarter two and that is obviously offsetting or more than offsetting the cash that we generated from operations, which is about $1.5 million, but more like probably a better way of looking at it is if you take the lease payment of $750,000, that’s probably about $800,000.

So cash from operations about $800,000 offset by CapEx of approximately $3 million and then six months of lease interest, which is $2 million, that’s note interest which is $2 million?.

Okay, and the tax payment is just, is it $5 million or just a little over $5 million. .

It's about – it’s going to be – it’s about $5.5 million. .

Okay, I think that's it for me. Thank you. .

Thank you. .

Okay, as we appear to have no more questions, lets close the call and thank you for your support and good afternoon. .

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect..