TRISTEL plc

("Tristel", the "Company" or the "Group")

Half-year Report

Product rationalisation to deliver faster top-line growth and higher profitability

Continued progress towards commercial launch in North America

Tristel plc (AIM: TSTL), the manufacturer of infection prevention products utilising proprietary chlorine dioxide technology, announces unaudited interim results for the six months to 31 December 2021.

During the period the Company refocused the business to accelerate top-line growth and increase profitability as it exits the pandemic. This focus is on Tristel's proprietary chlorine dioxide technology and the hospital market. These represent "Continuing operations". The Company has discontinued the manufacture and sale of most products in its Anistel and Crystel product ranges and these represent "Discontinued operations". The Discontinued operations command substantially lower margins, and the Board considers that they will not contribute to future revenue growth without significant investment.

 Financial highlights (from Continuing operations unless otherwise stated)

·    Underlying revenues* up 5% to £14.5m (H1 21: £13.8m) and 17% higher than pre-pandemic H1 20

o  Reported revenues down 7% to £13.6m (H1 21: £14.7m)

·    Gross margin of 83% (H1 21: 83%) against 53% for Discontinued products

·    Reported EBITDA of £2.4m (H1 21: £3.6m)

o  Adjusted† EBITDA of £3.3m (H1 21: £3.9m)

·    Reported EBITDA margin of 18% (H1 21: 25%) 

o  Adjusted† EBITDA margin 24% (H1 21: 26%)

·    Reported Profit before tax of £1m (H1 21: £2.4m)

o  Adjusted† Profit before tax of £1.9m (H1 21: £2.6m)

·    Diluted EPS 2.5p (H1 21: 3.96p)

·    Interim dividend 2.62p per share (H1 21: 2.62p)

·    Cash generated from operations £3.4m (H1 21: £4.2m)

·    Cash of £8.8m (H1 21: £7.3m)

·    Write down of intangible assets associated with Discontinued operations of £2.4m

·    Revenue from Discontinued operations £1.5m (H1 21: 2.0m) down 27%

* Underlying revenues adjusted for £0.9m NHS Brexit pre-stocking in H1 21, unwound in H1 22

† Adjusted for share-based payment charge of £0.9m (H1 21: £0.3m)

Operational highlights

·  Tristel (medical device disinfection) and Cache (hospital surface disinfection) are the two product portfolio brands that represent Continuing operations and, in the view of the Board, the best opportunity to deliver a faster rate of top-line growth and increased profitability

·    Animal health (Anistel) and pharma/life sciences (Crystel) product ranges discontinued

·   Restarted state-by-state registration of EPA-approved Duo and progressed FDA De Novo submission for Duo, anticipating submission to FDA by 30 June

Commenting on current trading, Paul Swinney, Chief Executive of Tristel, said: "We are pleased with our progress in the first half. We are observing a recovery in hospital activity in most of our markets.

"We are getting closer to entering the North American market, preparing to launch Duo Ophthalmology in Canada before the end of the year. In the USA we have re-commenced state-by-state registration of Duo Ultrasound under our EPA approval and are confident we will complete the FDA De Novo submission for Duo by June this year.

"The focus of the business is now solely on our core hospital market and our proprietary chlorine dioxide chemistry. The rationalisation of our business was substantially completed during the half, and we expect it to deliver faster top-line growth and higher profitability in the short and long term. We are going to exit this past two-year period of pandemic uncertainty with a sharper focus on the hospital market and will be better placed to capitalise on the enormous growth opportunities in healthcare where the need for our chlorine dioxide chemistry is greatest."

Chairman's statement

Trading

Throughout the first half, COVID-19 has put enormous pressure on healthcare provision in all our markets. However, there are signs that hospitals are returning to pre-pandemic levels of service, although this improvement is neither uniform nor consistent. Whilst we expect this "start-stop-start" pattern to continue through the second half, the number of diagnostic procedures that generate demand for our products is reviving globally.

We anticipate that second half revenue from Continuing operations will be higher than first half revenue.

Revenues

In H1 21 the NHS purchased Tristel products in preparation for Brexit. During the first half of the current financial year this inventory was fed back into the NHS system and used. Revenue in the comparative period last year was boosted by the Brexit purchase of £0.9m and this year's first half revenue has been reduced by the same amount. Adjusting for this distortion, sales of our Tristel and Cache products increased by 5% on H1 21 and were 17% higher than in H1 20, preceding the pandemic.

Product range rationalisation and Discontinued operations

The Company's focus in the first half has been on our Tristel and Cache brands which represent our most significant growth opportunity. To sharpen this focus, we have discontinued the manufacture and sale of products that are:

·    Non-chlorine dioxide based

·    Not sold into our core hospital market  

Sales of our non-chlorine dioxide products have been declining for several years (as shown above) and have been at lower gross margins than our core chlorine dioxide portfolio. Whilst the product ranges have always made a net profit contribution and have generated cash, the revenue decline could only be reversed by making a substantial and high-risk investment in bulking up our sales and marketing activities in markets which are dominated by multinationals manufacturing generic cleaning and disinfectant products at a scale which we did not believe we would be able to match.

During the half we have discontinued over 150 SKUs. In the period, revenue of these products was £1.5m, generating gross profit of £0.8m (gross margin 53%); in the comparable period last year revenue of these products was £2.0m, generating gross profit of £1.1m (gross margin 52%). In the full year to 30 June 2021, revenue was £3.8m, generating gross profit of £2.0m (gross margin 54%).

By contrast, a gross margin of 83% was achieved on the continuing chlorine dioxide hospital product range. 

Manufacturing activity in the first half was unaffected by the rationalisation which was phased in during the period. Production volumes were in fact constant as we enabled customers to stockpile inventory so they could locate alternative products and switch to them. The positive impact of the rationalisation on overhead will start to be felt in the second half, and the full impact will be experienced next financial year. 

Overheads associated with Continuing operations were £0.2m lower than in the comparative period. Group headcount on 31 December 2021 was 196, compared with 189 on 30 June 2021.

We are experiencing labour cost increases and component and raw material price increases across the Group and are increasing prices this year to match them.

Group profit before tax from Continuing operations fell to £1.0m (H1 21: £2.4m), impacted by a share-based payment charge of £0.9m, which compared to £0.3m in the comparative period last year.

Discontinued operations produced a loss in the period of £2.2m (H1 21: profit £0.7m). The loss included a loss arising from the write down of intangible assets of £2.4m (H1 21: £nil).

We benefitted from a tax credit in the period of £0.2m, compared to a tax charge of £0.5m in H1 21. The write down of intangible assets has given rise to a tax deduction, creating tax losses for the UK group. As these losses can be carried forward to be utilised against profits in future years, a deferred tax asset has been recognised in respect of the losses and results in an overall tax credit for the period.

Cash flow

We have continued to be very cash generative. Cash generated from operations was £3.4m in the first half (H1 21: 4.2m). Cash increased to £8.8m at 31.12.21 from £7.3m the previous year.

Earnings and Dividend

Basic earnings per share from Continuing operations decreased from 4.07p to 2.53p. Basic loss per share from both Continuing and Discontinued operations was 2.08p in the period (H1 21: basic earnings per share of 5.62p).

Diluted earnings per share from Continuing operations was 2.50p (H1 21: 3.96p). Diluted loss per share from both Continuing and Discontinued operations was 2.05p (H1 21: diluted earnings per share of 5.47p).

The Company's policy has been to pay out half of adjusted EPS in the form of an ordinary dividend each year. Given the extraordinary circumstances caused by COVID-19, we have decided to deviate from this policy, and we will maintain the interim dividend at the same level as last year. The dividend will be 2.62p per share and will be paid to shareholders on the register on 8 April 2022. The associated ex-dividend date is 7 April 2022.

North America

We have made good progress with our De Novo submission for the USA FDA for our DUO ULT product for ultrasound equipment, and expect to make the submission by the end of the financial year.

Working closely with our USA manufacturing and distribution partner, Parker Laboratories ("Parker"), we took the decision during the half to restart the state registration of DUO under its USA EPA approval. As background, we received EPA federal approval in two stages over the past few years and had started to register the product in individual states. However, we decided to put this programme on hold as Parker and ourselves were unsure of the commercial opportunity for the use of DUO with the EPA approval. Whilst this approval relates to ultrasound equipment it restricts DUO's use to skin surface ultrasound probes and other surfaces of the ultrasound console. Only FDA approval would permit DUO's use on intra-cavity probes which go inside the body and are considered higher risk procedures from an infection prevention standpoint.

There is a groundswell of professional opinion in the USA that a product like DUO, with the efficacy claims it has achieved, is more appropriate for skin surface probe disinfection, when the probe is used to guide the placement of venous catheters than more expensive equipment-based disinfection products that have FDA approval. A growing body of ultrasound practitioners is lobbying for the use of intermediate level disinfection in such circumstances rather than high-level disinfection. Our EPA approval confers intermediate-level disinfection status on DUO and the future FDA approval will confer high-level status on DUO.

We believe that we have a substantially expanded commercial opportunity in the United States ultrasound market with the regulatory strategy that we have pursued.

In Canada we are discussing the market launch of DUO for ophthalmology with various potential distributors.

Outlook

As the impact of the pandemic recedes and the number of endoscopies, ultrasound scans and other diagnostic procedures return to their pre-COVID-19 levels, we are confident that we will return to the growth trajectory we were on before 2020. The backlog for these procedures is front page news in all countries.

We have simplified the business and sharpened our focus on the hospital and our proprietary chlorine dioxide chemistry. We are better placed than before COVID-19 to capitalise upon a return to normal service in global healthcare. We look forward to growing our two core brands - Tristel and Cache - and expanding our global reach.

Bruno Holthof

Chairman

21 February 2022