IntriCon Corporation
Q3 2021 Earnings Call Transcript

Published: 8 Nov 2021

[Operator:]

Good day and thank you for standing by. And welcome to the IntriCon Corporation Third 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 is being recorded. I would now like to turn the call over to your speaker, Leigh Salvo. Please go ahead.

[Leigh Salvo:]

Thank you, Operator. 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-K and Form 10-Q respectively with the SEC. With that, I would now like to turn the call over to IntriCon’s CEO, Scott Longval, for a review of the company’s third quarter performance.

[Scott Longval:]

Thank you, Leigh. Good afternoon, we appreciate everyone joining us today. On the call with me is Annalee Lutgen, the company’s current Treasurer and Director of Finance, who have stepped into the role of Interim Chief Financial Officer effective October 29, 2021. I worked along the side of Annalee for nearly 12 years and have the utmost confidence in her ability to guide our finance department as we conduct a search for a permanent CFO. Turning to our third quarter results, IntriCon delivered a new record revenue quarter with total revenues increasing approximately 14% year-over-year. We also saw meaningful progress toward several very exciting catalysts on the horizon, that we are tracking for accelerated growth across multiple market opportunities. While we continue to experience the impact of pandemic related labor shortages, and supply chain constraints on our manufacturing business, we have continued to be successful in navigating these challenges to identify and implement options in order to meet the increasing demands of our customers and plans for accelerated growth in the coming year. As a reminder, our components and assemblies are integrated into Advanced Micro technology in a number of device platforms for global customers in the diabetes, surgical navigation, interventional catheter and hearing health markets. I'd like to take the next few minutes to cover the recent highlights and updates of our business in each of those markets. And then, I'll turn the call over to Annalee to cover our financials in more detail. Starting with the diabetes market, sales to Medtronic Diabetes Group represented 58% of our total revenue in the third quarter, with 24% growth over the third quarter of 2020 and 18% sequentially, primarily attributable to the continued launch success of the Medtronic MiniMed 780G in certain international markets and the Medtronic MiniMed 770G in the U.S. These launches have contributed to our strong results over the past several quarters, and we have the same expectation for the forthcoming Medtronic product launches, including contribution from the approval and launch of Medtronic's Guardian 4 Sensor. We are especially encouraged by Medtronic’s recent announcement that the one-year real world clinical data on over 3000 pediatric and adolescent patients achieved time and range results that well surpassed clinical consensus guidelines for the glycemic control using its MiniMed 780G system with the Guardian Sensor 3. Not only does this open up potential additional market opportunity for the system that further validates its benefits for patients of all ages. We are proud to be their partner of choice in delivering advanced products like this to the global market. Turning to our surgical navigation and interventional catheter business. We further expanded our business with existing customers, as well as progressed on several new opportunities that we're confident will provide additional future growth. More specifically, surgical navigation, which includes our medical coil product line continued to build up the strength of the second quarter, as we ramped up production capacity to meet customer demand ahead of a planned commercial launch. Medical coil revenue in the third quarter was $2 million, up 31% year-over-year, and 18% sequentially from the second quarter of 2021. Interventional catheters developed and manufactured through our Emerald Medical Services business experienced a lighter third quarter following a strong first half, due in part to the COVID related flare up in Japan around the time of the Olympics, which partially limited operations. This portion of our business also experienced some supply chain related constraints but we're actively pursuing alternatives that will best enable us to continue to meet customer demand and timelines. Revenue from EMS in the third quarter totaled $3.4 million, a 22% year-over-year improvement, and then 18% decline over Q2 2021. We expect a continued international adoption of interventional catheters manufactured by EMS and further expansion opportunity with products pending FDA submission will lead to meaningful upside in 2022. In summary, we believe there's a significant potential for growth in these markets, where our collaborative enterprise capabilities of complex catheters and microcoils are well suited to drive innovation and differentiation. Turning to Hearing Health, in the third quarter revenues declined approximately 14% to the prior year, largely due to timing of orders as year-to-date revenues in this market were up 21%. Supply chain impacts also contributed to the decline year-over-year, but we expect to recoup this revenue over the next few quarters. Last month, the FDA published the highly anticipated proposal to establish a new regulatory category for over the counter hearing aids. IntriCon has been a major supporter to open this market, as we believe it offers much needed broader public access to hearing aids at a significantly lower cost for the estimated 30 million Americans suffering from age related hearing loss. Under the proposal, Americans 18 years or older with perceived mild to moderate hearing loss would have access to less expensive and significantly more accessible hearing aid alternatives, where previously they would be required to get a prescription from an audiologist, in addition to several visits for fitting, adjustments and maintenance. There is a widespread bipartisan support for the proposal, and we are very optimistic for its approval. A longstanding priority for IntriCon has been identifying securing partnerships with other participants in the market that can benefit from our hardware, firmware, software and backend support. We have never been better positioned to partner with a wide range of participants in this emerging market. As part of our preparation to support the OTC market, earlier this year, we commenced a clinical trial for our proprietary self-fitting software, and in September received notice that a summative usability validation had been completed, which allows a clinical trial of the software to progress. With this milestone, we remain on track to complete ahead of the anticipated FDA final ruling, enabling us to further advance our positioning an ecosystem of care to support customer experience and success with OTC hearing aids. Our pilot program with HearX continues to expand and has been met with widespread excitement as the market moves towards an anticipated OTC option, encouragingly, we are seeing increased demand from HearX for our hardware, firmware and software technology. In parallel, we are driving opportunities with additional partners that see the value of our ecosystem of care as they enter the space. We have tremendous confidence in the potential of this new market and we have done a great deal of work to position IntriCon as the joint development and manufacture of choice. As we enter the final quarter of the year, I believe we are better positioned than ever within the markets we serve. Customer demand remains high across all of our core markets. Our existing partnerships are secure and we have a significant number of catalysts emerging that I'm confident will drive our growth in 2022 and beyond. In the short-term, we do anticipate that the fractured supply chain and labor shortages, which created inefficiencies that impacted our margins in the third quarter, will persist, at least through the remainder of the year and may continue to constrain margin expansion in the short-term as we enter 2022. That said, we are taking steps to minimize these challenges, including dual sourcing, increasing inventory levels, and customer price increases. We also believe over time, we will reach greater direct labor efficiencies, as newer employees are trained and gain line experience. In summary, I'm confident that these challenges to our supply chain and staffing are transitory. We're taking immediate action to mitigate the impact and over time, as the macro environment stabilizes, we can achieve even greater operational efficiency, resulting in margin improvement. Importantly, continued high level execution and consistent growth throughout an undoubtedly challenging time perfectly exemplifies the resilience of our business and the team we have assembled. With that, I'll now turn it over to Annalee. Annalee?

[Annalee Lutgen:]

Thank you, Scott. Now turning to our financial results, recall in the first quarter, we adopted the use of non-GAAP reporting to provide a clear picture of our growth and transformation. Reconciliations to the most directly comparable GAAP measures are provided in the table accompanying the press release we issued today. For the third quarter of 2021, as Scott noted, we reported net revenues of $31.1 million, an increase of 13.5% over the prior year period, primarily driven by increases in our diabetes, interventional catheter and surgical navigation market. GAAP net income for the quarter was $300,000, or $0.04 per diluted share versus net income of $600,000 or $0.07 per diluted share in the prior year period. Non-GAAP adjusted net income was $1.7 million, or $0.17 per diluted share in the third quarter of 2021 versus net income of $2.4 million or $0.25 per diluted share in the prior year period. Diabetes revenue increased 24% to $80 million, compared to $14.5 million in the prior year third 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 United States. Interventional catheter revenue increased 22% to $3.4 million from $2.8 million in the comparable prior year period. The year-over-year increase was driven primarily by the continued expansion of Medtronic’s Chocolate Balloon manufactured by EMS. Surgical navigation revenue was $2 million, an increase of 31% over the prior year period and 18% sequentially from the second quarter of 2021. 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 third quarter was $4.7 million, a 14% decline over the prior year third quarter. The primary driver in this market was supply chain and input constraints, which we have mostly addressed in early Q4. As orders continue to remain strong, we anticipate hearing help to rebound in the 2021 fourth quarter. Third quarter gross margins were 23.1% compared to 26.3% in the prior year comparable periods. The lower margin was due in part to supply chain constraints, higher labor costs and product mix. Operating expenses were flat for the third quarter at $6.7 million for both the current and prior year period. During the 2021 third quarter, we reduced the EMS earn-out liability by $460,000, which was offset by increased business development and marketing investments. As of September 31, 2021, we had $33.1 million of cash and investments compared to $33.5 million as of December 31, 2020, with positive operating cash flow from operations of 3.2 million, year-to-date primarily attributable to higher cash earnings associated with our business growth and ease of COVID-19 restriction. Turning to our outlook for the full year, given our strong year-to-date performance, we're confident in raising the lower end of our guidance and now anticipate our 2021 revenue to range from $123 million to $125 million representing year-over-year growth of 20% to 22%. With that, Scott and I would now like to open the call for questions. Operator?

[Operator:]

Thank you. We have a question from the line of Jon Block with Stifel.

[Tom Stephan:]

Hi, this is Tom Stephan on for Jon. Thanks for the questions. If I can start off with diabetes, as it relates to guidance, results were really strong in the quarter. And it seems like you're able to get to your guidance of 124 million at the midpoint, up from I think it was the initial 121 million despite the Medtronic U.S. diabetes pipeline potentially slipping into 2022. So Scott, maybe for you, does that speak favorably to the trend line into 2022 in diabetes, maybe as those approvals could potentially be 1H 2022 events?

[Scott Longval:]

Yes. We think that, obviously, the momentum that we've gained in the diabetes business coming into the third quarter was strong. We continue to see strengthening from that business, a lot of it's attributed to some of the success that they've had with the 780 internationally. Obviously, we talked a little bit about what they're seeing with the 780 in terms of some of the clinical data compared to the real world data, which is very positive, both on adults, and then more recently, the announcements within adolescents. So if we think about that momentum, as they look to gain approval here in the U.S., we think there's some tailwinds. And then the Guardian 4 Sensor, we also think brings a lot of customer to lights, as we look out into 2022 and beyond. We think there's a lot of good things happening with diabetes business.

[Tom Stephan:]

Great, thanks. And then, if I can pivot to hearing, maybe a couple here, just on the OTC hearing landscape and potential partnerships. How would you describe your discussions today with potential partners since the proposed rules were obviously published, they accelerated or even entered more final stages?

[Scott Longval:]

Yes. So we've been working, as we've mentioned, with a host of partners, for the last several quarters, and those continue -- those discussions continue to evolve. We've talked in detail kind of the pilots that we're doing with hear experts, other potential partners that were well down the path of putting business plans together as they look to enter this market, probably in conjunction with the final OTC regulations. But those discussions are pretty far down the path. We're very excited about those relationships. We think both of the groups that we're working with today have the ability to effectively scale in this market and meet the consumer at the point of care, which they think will be most advantageous. So excited to be working with multiple partners. And then, I would say since the OTC regulation, draft guidance was issued, there's just been more and more activity there. And so this is where IntriCon is going to have to be disciplined to ensure that we're being thoughtful in terms of the partners that we want to move forward and spend our time and effort supporting. So those partners again that have the ability to scale the financial wherewithal to scale have the expertise and directly engaging consumers, those are the traits that we're looking for. And based on what we've seen, we think, again, that's this market continues to harbor tremendous opportunity for us.

[Tom Stephan:]

Okay, great. That's great to hear. And if I can squeeze in a follow up just to that question, what can or will you convey to the street as far as these OTC partnerships and wins go? I think it'd be helpful, just to get a sense for what types of updates or disclosures, we may be getting as things can now move forward at a greater pace. Thanks.

[Scott Longval:]

Yes, thank you. That's a difficult one for us. As you know, we're working with a lot of partners, and we do it in a confidential manner as they're working to put their business plans together. So a lot of those relationships until we're actually out there with them and marking the programs, we probably won't be able to talk too much in terms of specifics. That being said, we'll continue to give kind of general comments in terms of how we think those relationships are progressing, and hopefully be able to give insights in greater detail after the launches occur.

[Operator:]

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Scott for any final remarks. Sorry, we just got one more that jumped in the queue. Kyle Bauser with Colliers Securities.

[Kyle Bauser:]

So, just a quick follow-up. So on the self-fitting trial, great to see the update on being able to move forward. And it's going to jive really nicely with the current public comment period regarding the FDC guidelines, I think ends in January at some point. Can you just kind of walk through what some of the next steps are? So do you envision press releasing any sort of data readout? Or would it be more of a situation where you just press release, the fact that you've submitted the application to the FDA and just trying to understand the cadence of milestones for that trial?

[Scott Longval:]

Thanks, Kyle. So as we've talked about in the past, in order to kind of satisfy statistical goal, we need roughly 80 patients in the clinical, we have over 116 that are currently signed up. Our goal is to continue to push through the clinical at the point at which we submit to the FDA, obviously, we'll have some communication and depending on what the data reads, and how much we want to have public at that point, will include some of the details. But I would say, don't expect too much in terms of release, other than the fact that we have submitted the application to the FDA.

[Kyle Bauser:]

Got it. But it sounds like, even after the public comment period, it takes a couple more months for the rule to become final. Sounds like that you're on pretty good pace with the trial had a kind of a final ruling. Is that fair?

[Scott Longval:]

Yes. And that's what we talked about Kyle from, trying to make sure that we timed it correctly, right. So if you look, the draft going through -- it was released on October 20. They have a comment period for 90 days. And we will have our own formal comments to the FDA. There'll be a period of time in which the final rule will be written and then that will go into effect 30 days after. So I think we're looking at most likely towards the end of the second quarter, maybe the early part of the third quarter. But regardless, if you look at what was included in that draft guidance, there was a lot of benefits to IntriCon, a lot of the topics that we have been focused on over the last several years that we think is key to increase penetration in the U.S. market were encompassed. So having the self-fitting devices have their own regulatory classifier was critical. Being able to include mild to moderate and those moderate individuals makeup, in my estimation, the largest pool of people that which the OTC will be directed. And that was kind of confirmed with some of the DB output limits that they put out there. So we know we're going to be able to meet those needs of the moderate hearing loss. And I think the other thing in that OTC that helped kind of build a moat around IntriCon's technology, both the hardware, software and firmware is some of the electro acoustical performance requirements. So it was clear, when the FDA put this draft guidance out, they were very thoughtful in terms of the types of devices that they would classify as an OTC hearing aid. And those had to be ones that performed at a very high level, we think that puts us in a very strong position. As we've seen over the last several years, there's a number of -- I'll call them cheap, personal sound amplifiers that are out on the market, that's not going to cut the mustard for what the FDA is laid out in terms of their electronic audio acoustical performance requirements. So all that I think puts us in a really strong position, as we start to think about 2022, and how we're going to be really the support engine for what's going to be a very exciting senior health care market evolve in the U.S. over the next several years.

[Kyle Bauser:]

Got it. That's helpful. Appreciate that. And then, maybe just lastly, regarding that EMS business, I mean, from a transaction perspective, is probably one of the best, most accretive transactions we've seen in the last 12 to 24 months. I’m just curious, how do you size that market? What's the medium-term growth rate that would make sense just trying to understand how much runway we have there? Thank you.

[Scott Longval:]

So as we've laid out, we saw some hyper growth coming out of that business over the last several quarters slowed a little bit here in the third quarter. And that was really driven by some flare ups of COVID, over in pockets in Asia. And we do have some supply constraints for raw materials for that business in the fourth quarter that we're working through. But longer term, we're very excited about where that business can go not only with current programs that we're working on, that are in development, with customers that we think can provide meaningful revenue contributions in the back half of '22. But longer term, we see a convergence of that interventional catheter business with some of the work that we're doing on the medical coil side and the sensor side. So putting sensors and catheters that allow for biometric readings that can provide a greater information to the doctors and the nurses. And we think there's a lot of opportunities there. We're kind of medicine is moving and we're going to be in a good position to take advantage of that.

[Operator:]

All right. Thank you. And turning the call back to you, Scott. I don't see any additional questions.

[Scott Longval:]

Excellent. I just like to thank everybody for spending some time today -- giving an update with IntriCon. We're very excited about the business that we built the opportunities that we have in front of us and look forward to continuing to update the group accordingly. Stay safe and have a great evening.

[Operator:]

And with that, ladies and gentlemen, thank you for participating in today's program. You may now disconnect. Have a wonderful day.