IntriCon Corporation
Q2 2021 Earnings Call Transcript

Published: 9 Aug 2021

[Operator:]

Good afternoon. Thank you for standing by. And welcome to the IntriCon Corp.’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to your speaker today, Leigh Salvo. Thank you. Please go ahead.

[Leigh Salvo:]

Thank you, Cherry. Before we begin, I would like to preface our remarks with the customary Safe Harbor statement. Today’s conference call contains certain forward-looking statements. These statements are based on the current estimates and assumptions of IntriCon’s management and are subject to uncertainty and changes in circumstances. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual results may vary materially from the expectations contained in today’s call. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-q and Form 10-K with the SEC. With that, I would now like to introduce IntriCon’s CEO, Scott Longval, for a review of the company’s first quarter performance. Ellen Scipta, the company’s CFO will then cover the financial results in more detail. And at that point, we’ll open the call for your questions. Scott?

[Scott Longval:]

Thank you, Leigh. Good afternoon. We appreciate everyone joining us on the call today. IntriCon delivered another solid quarter, with results underscore the opportunity we have across multiple aspects of our vibrant and growing business. Despite the rapidly changing operating environment over the last 18 months, we’ve executed against our operational goals, expanding our leadership team and advancing our market leading capabilities as a joint development manufacturer in micromedical technology. Turning to our second quarter results, we saw solid financial performance and continued operational execution. Total revenues increased approximately 28% year-over-year to $30.2 million. This outperformance was largely due to strength we saw in each of our primary business lines, including Diabetes, Hearing Health, Interventional Catheters and Surgical Navigation, with each of these businesses posting double-digit growth year-over-year. As anticipated, we saw a slight sequential decline due to the impact of COVID-19 related pent-up demand recognized in the first quarter of 2021, as well as challenges relating to staffing and supply chain constraints that persisted into the second quarter. During the quarter, we’ve made progress in hiring and retention of direct labor staff. We were also successful in returning our constraint revenue inputs back to normal inventory levels. However, in light of the current landscape, we continue to monitor our supply chain for any changes that could impact our business later in the year into 2022. Turning to a deeper dive on each of the business lines, starting with Diabetes, sales to Medtronic Diabetes Group represented 50% of our total revenue in the second quarter, primarily attributed to the continued long success of Medtronic MiniMed 780G in certain international markets and the MiniMed 770G in the U.S. Sales in our Diabetes business line grew 13% in the second quarter, over the second quarter of 2020. We expect sales from this business line to strengthen for the remainder of the year, driven by these recently launched systems coupled with growth from for coming Medtronic products. Turning to the Surgical Navigation and Interventional Catheter business lines, we continue to see potential opportunities, we’re collaborative enterprise capabilities of complex catheters and micro coils are well suited to drive innovation and differentiation. We expect these business lines to drive future growth over the long-term, including in high growth markets such as interventional pulmonology, electrophysiology, neurovascular and peripheral vascular. Revenue from Emerald Medical Services or EMS in the second quarter totaled $4.2 million, the 266% increase year-over-year and a 10% improvement over Q1 2021. Recall EMS was acquired in May of 2020. During the second quarter, we saw continued international adoption for Medtronic Chocolate Balloon Catheter manufactured by EMS. Longer term we intend to leverage EMS’ strong reputation with Medtronic’s Cardiac and Vascular group with IntriCon’s core technology and financial stability to secure other business opportunities in this market. In the second quarter, our Medical Coil product line, which we include within our Surgical Navigation business rebounded significantly. This increase was driven by added production capacity as we work through specific labor challenges faced early in the year. Medical Coil revenue in the second quarter was $1.7 million, up 54% year-over-year and 56% sequentially from the first quarter of 2021. Turning to the Hearing Health business line, in the second quarter we delivered growth of approximately 43%, compared to the prior year period and 13% over the first quarter of 2021. In early July, we were encouraged to see the legislative proposal that opens the door for hearing aids to be sold over the counter once again we brought to the forefront to the new executive order. The Department of Health and Human Services was directed to consider issuing proposed rules for allowing hearing aids to be sold over the counter within 120 days. Accordingly, we expect to see addressed FDA proposal during the fourth quarter, the final regulation in place in the first quarter of 2022. As you may recall a year ago IntriCon made the decision to restructure our Hearing Health drug and consumer business eliminating the majority of the operation including the sales team, support staff and advertising spend to focus our resources on the opportunities we saw emerging in Indirect End Consumer channel. More specifically, this restructuring enabled us to target partnerships with the intent of the partner will drive distribution, marketing, advertising and selling support of the OTC products. Meanwhile, we’ll remain focused on our core competencies, providing hardware, firmware, software and back end customer support. And as we’ve mentioned previously, IntriCon has ongoing discussions with many potential partners who are seeking a relevant share of the OTC hearing aid market. Our Indirect End Consumer channel continues to benefit from increasing volumes required to support the pilot with hearX. This pilot offers IntriCon firmware and hardware within the hearX OTC hearing aids available in Walgreens stores in select states and online for a $799 one-time payment per pair or $49 per month per pair subscription service. This compares to an average of $4,800 per pair to the traditional audiology channels. This pilot has now been given the green light to expand in several additional markets beginning this month. Thus far, the pilot has been successful, providing meaningful learnings with respect to both the partnership model, as well as the execution of our strategy from the hearing test, device fitting and setup and customer support. Additionally, to support both the OTC and other Hearing Health products, we are focused on our self-fitting software clinical trial that we launched in April of this year. During the quarter we completed patient enrollment and still expect completion of the trial by the end of the year. Lastly, our legacy Hearing Health business has leveled following the post-COVID backlog spike. As our partnership model is defined and refined, we expect to see these legacy sales become a smaller overall portion of our Hearing Health business. I am excited by the meaningful progress we are making in both the transformation and the expansion of our business in the markets we serve, while at the same time taking steps to build our pipeline and enter new markets that can further support our long-term growth and diversify our revenue base. Earlier today, we announced that we welcome Dave Liebl to the IntriCon team as Vice President of Research and Development. Dave brings an exceptionally diverse background with experience in technology, business and product development, regulatory affairs and M&A. Most recently, he was President of Biomerics NLE West Operations with responsibility for the growth of the company’s laser processing technologies through interventional medical device market. Dave will highlight the great progress we’ve made in building our leadership team over the past 18 months, with the leadership team coming together, combined with continued solid execution of our operational planning and further advancements of our capabilities, I am confident we are in the best position to-date to pursue opportunities in our target market. With that, I will now turn the call over to Ellen to provide more detail on our financial results for the first quarter -- for the second quarter of 2021. Ellen?

[Ellen Scipta:]

Thank you, Scott. Now turning to our financial results. Recall last quarter we adapted the use of non-GAAP reporting to provide a clear picture of our growth and transformation. Reconciliations to most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today, including comparable data for the entire financial year of 2020. For the second quarter of 2021, as Scott noted, we reported net revenue of $30.2 million, an increase of 28% over the prior year period, with increases in each of our key business lines, including Diabetes, Surgical Navigation, Interventional Catheters and Value Hearing Health. GAAP net loss for the quarter was $1.2 million or $0.13 per diluted share versus a net loss of $2.3 million or $0.26 per diluted share in the prior year period. Non-GAAP adjusted net income was $2.1 million or $0.23 per diluted share in the second quarter of 2021 versus a net income of $2.1 million or $0.23 per diluted share in the prior year period. Diabetes revenue increased 13% to $15.2 million, compared to $13.5 million in the prior year second quarter. The growth was primarily attributable to the continued launch success of the Medtronic MiniMed 780G in certain international markets and the MiniMed 770G in the U.S. market. Interventional Catheter revenue increased 266% to $4.2 million from $1.1 million in the comparable prior-year period. The year-over-year increase was driven primarily by the expansion of Medtronic’s Chocolate Balloon manufactured by EMS and full quarter impact of EMS, which the company acquired in May 2020. Surgical Navigation revenue was $1.7 million, an increase of 54% over the prior period and 56% sequentially for the first quarter of 2021 -- from the first quarter. This increase was driven by added production capacity as the company worked through specific labor challenges faced earlier in the year. In our Hearing Health business, total revenue in the second quarter was $6.4 million, 43% over the prior year second quarter and 13% sequentially. The primary growth driver in this market was the Indirect to End Consumer business related to volumes required to support the OTC pilot program. Do note our Hearing Health revenues year-to-date include a class of legacy OEM business revenues to our Indirect to End Consumer business. This has resulted in a move of $682,000 to ITEC in Q1 as noted in our 10-Q. Second quarter gross margins were $26.1 compared to 28% in the prior year comparable periods. The lower margin was due to an increase in direct labor costs and temporary Q2 2020 cost reductions as part of the company’s COVID response. Operating expenses for the second quarter were $8.8 million, compared with $9.2 million in the prior period. The decrease of $400,000 was primarily due to overall lower cost structure post the 2020 restructuring of the Hearing Health Direct to Consumer operations and timing of certain one-time events impacted both the current and prior period. In the current period, the company recognized a $1.4 million charge in relation to a one-time litigation settlement and attorney fees to resolve the 2019 TCPA lawsuits associated with our Hearing Health Express business that was disclosed within an 8-K issued on August 5, 2021. As part of the 2020 restructuring, mentioned by Scott earlier in this call, the company no longer engages in any outbound consumer marketing. The current period operating expenses were also impacted by a full quarter of EMS ownership totaling $700,000. These expenses were offset within the prior year comparable period by $1.2 million related to restructuring and $500,000 in relation to a one-time acquisition costs for EMS. As of June 30, 2021, the company had $32.9 million of cash and investments, compared to $33.5 million as of December 31, 2020. The decrease in cash flow was driven by the timing of receivable collections of our largest customer and is expected to rebound in the second half of the year. Turning to our outlook for the full year, given our strong performance in the first half of 2021 and confidence we see in our end markets, we are raising our revenue guidance for 2021 to $121 million to $125 million, representing year-over-year growth of 18% to 22%. This guidance represents a strong outlook for the second half of the year, while managing ongoing direct labor challenges. Recall despite the impact of the pandemic, we have maintained full manufacturing operations throughout the past 15 months. We continue to monitor the CDC guidance and Delta variant as we finalize our return to site plan. While the timing remains fluid, we are excited to reunite on site, boosting enterprise collaboration and further cultivating our organizational culture. We’re confident that maintaining a level of flexibility will allow us to continue to execute the best practices identified from remote work. In closing, we remain committed to a strategy that will enable us to further diversify our customer base, add valuable partners and expand into additional high growth end markets that will best leverage our core capacities in micromedical technologies to drive both organic and inorganic growth. With that, Scott and I would now like to open the call for questions. Cherry?

[Operator:]

Your first question comes into line of Jon Block from Stifel. Your line is now open.

[Tom Stephan:]

Hi. This is Tom Stephan on for Jon. Thanks for the questions. Scott, starting with Hearing, the ITEC number was nicely above our estimate, has hearX been tracking above your expectations, and then, the expansion of the pilot program maybe ahead of schedule due to the success? And then maybe for ITEC is the $2.6 million maybe a good baseline to work off of moving forward?

[Scott Longval:]

Excellent. I’ll take the first question and maybe for the second question I will ask as we started with pilot we can do really a test. In this market, we’ve been not considered to be a major contributor, primarily because there was no blueprint for taking devices into retail outlets like you’re actually doing. That said, we’re pleasantly surprised with not only the feedback that we’re getting from the pilot that the volumes that hearX has been able to drive through that retail outlet. And I think that’s highlighted by the green light to expand this pilot here in the second half of the year. So, overall, we’re very pleased with how that pilot is kicked off and we remain very optimistic about this being the blueprint of what could be for the future of OTC. And then in terms of looking for a baseline at that level to consider, I think, that’s a fair baseline, as we look to add additional pilots into the later half of the second half of the year and into 2022. Clearly, we anticipate that to build and ultimately ITEC will be a major revenue generator for IntriCon in the years to come.

[Tom Stephan:]

Got it. That’s helpful. And then, shifting to revenue guidance, Scott, last quarter, you talked about 4Q revenue being likely above 1Q, which was I think a little under $32 million. Does that expectation stand, as we think about the cadence of revenue in the back half? I think it’s so that might imply a step down from 2Q to 3Q, but maybe -- how should we think about the 3Q and 4q progression? And then sticking with guidance, Scott, in your prepared remarks, I think you said you expect Diabetes sales to strengthen in 2021 due to new products. Does that mean 780G and Zeus are in the U.S. baked in?

[Ellen Scipta:]

Sure. I will take the first part of that question. So I think when you think about Q3, I think, little flat and then will ramp into Q4. And based on some of the expectations we have of Diabetes growth and the pilot growth that Scott in the back can you address .

[Scott Longval:]

Yeah. As we think about those products both 780 and Zeus product launched consistent with Medtronic comments, they’re high in both of those for later in the year, based on the most recent comments, and we’re following suit. So based on those communications, we feel like we’re going to see the strengthening as we round out the year within our Diabetes business.

[Tom Stephan:]

Okay. Great. That’s helpful. And then last one for me just now on EMS. You just did $4.2 million in revenue. Again, above are estimates, another run rate question, but should we think about that kind of for the remainder of the year around that $4 million plus range? And then, what’s kind of a normalized growth rate for that business that we can think about? Thanks, guys.

[Scott Longval:]

Yeah. I think that’s -- I think that we clearly had some demand there, driven by the international launch the Chocolate Catheter. I suspect that to be relatively flat in the second half of the year, maybe even slightly down. That said, we’re working on a number of different programs there that we think will provide big lift as we enter into 2022. But for the back half of the year, I would say, kind of a baseline there, potentially even slightly down in the second half of the year.

[Tom Stephan:]

Got it. Thanks again.

[Operator:]

Your next question comes from the line of Andrew D'Silva from B. Riley Securities. Your line is now open.

[Andrew D'Silva:]

Hey. Good afternoon. Thanks for taking my questions and congrats on the progress. Just a couple quick ones for me, and sorry, if you answered any of these, I was jumping between calls. To start just on the bookkeeping side, what was the share count utilized for your $0.23 adjusted EPS and while that’s being pulled, I was curious as it relates to the Diabetes business, can you give a little bit of context around just MiniMed 670G, 770G and 780G dynamic. Really curious, I believe this new sensor was approved in Europe recently. So I just want to understand the dynamics there and maybe where growth is now and where could be coming out of with the -- with a U.S. this approval?

[Scott Longval:]

Yeah. So a great question. So I’ll take that and then Ellen will comment on share count. So, obviously, that the 6 -- that the 780 and the 770 are both getting great reviews. So the 780 over in Europe, Medtronic commented last quarter that they’re actually climbed back market share and as we combine or they combine the 780G platform with the Zeus sensor, which you know and it is a big customers’ away. Eliminating the daily calibrations and fingerprinting down to potentially just one-time at the onset of use of the sensor is something that they believe is going to be able to drive a lot of excitement here in the U.S. market. And so with that, we’re anticipating seeing a strengthening as those products launch here in the U.S. market and also as the Zeus launches internationally. So I can tell you that based on the discussions that we’re having, there’s a lot of excitement around both of those platforms, especially as they get integrated into the research center.

[Ellen Scipta:]

9.6 million share.

[Andrew D'Silva:]

Perfect. Thank you for that. And how about with ancillary offerings, Medtronic, their intent, I believe, has CGM attachment possibility as well. And then the standalone CGM Guardian Connect and the professional iPro CGM 2, is there any sort of thought process there or how should we think about that layering on?

[Scott Longval:]

Yeah. Well, all those products are in the portfolio, the suite of products that we provide for Medtronic on the sensor side. And so as we think about their entree into MDI, multi-daily injections with the release of the nPIN , we believe that there’s opportunities for them to sell more transmitters is part of that offering and as they move into the earlier disease states. And similarly we believe with again that Zeus technology as we think about the standalone products with the customer satisfaction is going to be significantly higher because of the lack of daily calibrations required. I think all that can provide risk as we can exist the 2021 and enter into 2022.

[Andrew D'Silva:]

Yes. Yes. One more on the Medtronic side, where are you as far as getting the Minnesota manufacturing facility to where you see and are we nearing the automated sensor assembly being implemented. Also, I believe there were a couple new ancillary, new services with the Diabetes group too just where are we with all that in general?

[Scott Longval:]

Yeah. Very good question. So as we think about the production of the automated needle assembly, it’s still a little bit of a hybrid where we are now running the automated needle assembly. We also have some manual assembly processes going and that really has to do with kind of geographic regions and where things have been approved and where they haven’t. So that’s kind of a hybrid right now. But definitely trending to the automated assembly process. And then in terms of ancillary services that we’re providing for a number of the products to the major transmitters that we’re doing for Medtronic today. We’ve started doing the packaging and labeling to package all the products on the sensor side that we do and send those to Medtronic distribution site. So putting in all of the quality management systems and vision systems required to do that has been a significant effort. But I think this illustrates the confidence that Medtronic has enough as a supplier and further integrates IntriCon into their ecosystem. So we’ll start to see more and more of that activity again as we exit 2021 and move into 2020.

[Andrew D'Silva:]

Thank you. Last question for me, it’s just related to the last month executive order. Have you seen any changes within a Hearing Health department dynamics since that time or how should we think about the Indirect End Consumer opportunity cadence over the next couple quarters, given everything that’s going on in the market right now?

[Scott Longval:]

We haven’t seen significant movement on the regulatory side, and obviously, they’re nothing less behind the scenes. But what I thought that executive order really did was a couple of things, it brought to like the importance of hearing healthcare in the market and having the President talk about the need to find alternative distribution. And bringing this into the mainstream, I think, was important in keeping it on top of mind, together, they really started to build confidence with some of the partners that we’re talking to and getting them excited about the fact that there will be -- there is an insight for this regulation. And we’ve started to have more and more discussions on the business development side and those discussions have further, I would say, over the course of the last several months and those comments in that executive order, I think, gave people that the result to begin to move forward.

[Andrew D'Silva:]

Perfect. Thank you very much. Congrats on the progress and good luck on going forward.

[Scott Longval:]

Thank you and have a great day.

[Andrew D'Silva:]

You too.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to Scott Longval.

[Scott Longval:]

Okay. Thank everybody for joining us today. I look forward to updating the group as we enter in the back half of 2021, if everybody stays safe and healthy, and look forward to the next call. Have a good night.

[Operator:]

This concludes today’s conference call. Thank you all for joining. You may now disconnect.