IntriCon Corporation
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the IntriCon Corporation's First Quarter 2021 Earnings Conference Call. At this time, all participants' lines 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 hand the conference over to your speaker today, Ms. Leigh Salvo. Thank you. Please go ahead.

[Leigh Salvo:]

Thank you. 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.

[Scott Longval:]

Thank you, Leigh. Good afternoon and thank you for joining our 2021 first quarter conference call today. We entered the year strong, building on the momentum on the second half of 2020. As we reflect on an impressive first quarter, I'd like to take a moment to thank our employees, partners and suppliers for their unwavering support throughout the many challenges the past year has presented. I continue to be encouraged by the significant opportunity we have to drive growth in our key markets, specifically diabetes, surgical navigation, interventional catheters and hearing health. Throughout the remainder of the year ahead, we are focused on securing opportunities to diversify our customer base, adding valuable partners and expanding into new high-growth end markets that can best leverage our core competencies in micro medical technology and drive both organic and inorganic growth. Turning to our first quarter results. We saw strong financial performance and continued operational improvements. Total revenues increased approximately 48% year-over-year to $31.8 million, and sequentially, revenues increased 5%. Although we experienced some headwinds pertaining to COVID-related labor challenges, the results exceeded our initial expectations. This outperformance was largely due to the strength we saw in our diabetes and hearing health business lines, with each business posting double-digit growth year-over-year. Drilling down to each of our end markets. Starting with diabetes. Sales to Medtronic Diabetes Group represented 58% of our total revenue in the first quarter. We saw renewed strength in this sector out of our business during the fourth quarter of 2020 stemming from Medtronic MiniMed's 780G launch in certain international markets and the MiniMed 770G launch in the U.S. That momentum carried into the first quarter, resulting in an impressive 36% growth over the first quarter of 2020 and 4% sequentially. We are optimistic sales of these new systems and other forthcoming Medtronic products will deliver increasing growth in the second half of the year and beyond.

[Ellen Scipta:]

Thank you, Scott. Now turning to our financial results. You may notice in our release and on this call, we have adopted the use of non-GAAP reporting to provide a clearer picture of our growth and transformation. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today. For the first quarter of 2021, we reported net revenue of $31.8 million, an increase of 48% over the prior year period. The increase was primarily due to our medical and hearing health legacy OEM product line. GAAP net income for the quarter was $714,000 or $0.07 per diluted share versus a net loss of $2 million or $0.22 per diluted share in the prior year period. Non-GAAP adjusted net income was $2.5 million or $0.26 per diluted share in the first quarter of 2021 versus a net loss of $682,000 or $0.08 per diluted share for the prior year period. Core business revenues in our medical market for the quarter were $25.1 million, a 54% increase year-over-year and represented 79% of the total revenue, which is slightly more than the prior year due to our EMS acquisition. EMS contributed $3.8 million to the first quarter, growing 12% or $400,000 quarter-over-quarter.

[Operator:]

[Andrew D'Silva:]

Just a couple of quick ones for me. I was curious as it relates to the strength in the diabetes business. Could you give a little bit of color if that was coming out of the MiniMed 670, 770 or 780G? I'm really just curious because I don't believe that these sensors have been approved yet. So I want to understand the dynamics there and maybe where growth is now and where it could be coming out of later?

[Scott Longval:]

Yes. Good question, Andy. Thanks for calling in. So the growth from the diabetes business, really the momentum that was carried forward that we saw in Q4, was largely due to the 780 launch internationally and the adoption here of the 770 in the U.S. market. And we talked about some of those growth catalysts for the back half of the year that we're eyeing. More specifically, the 780 here in the U.S. and then also the Zeus platform, we think those can be two catalysts for growth in the back half of the year and well into 2022. We haven't seen those obviously come through, and I can't comment on specific timing of Medtronic. I'll leave that up to them. But again, the strength in that first quarter was really momentum carried forward off of what we saw in the fourth quarter.

[Andrew D'Silva:]

Okay. And then I'm a little surprised at how strong the OEM hearing sales have been. I mean, this quarter obviously saw over 70% growth year-over-year. I would have thought that the value-based sharing, just from a market standpoint, would have seen a lot faster adoption just given the pandemic and the elective procedure protocols and so on. But can you give us a little bit of color on some of the dynamics there? Is this a kind of a short-term bolus that's taking place in the quarter? Or is it more durable? And should we expect the OEM hearing aid sales be a significant contributor for the year?

[Scott Longval:]

We look at that OEM legacy where we've seen the pop over the last couple of quarters. There's more pent-up demand. When we took a pause in that late first quarter, second quarter, third quarter, when COVID hit in 2020, really shut down the legacy business and access to audiologists, because that's opened up a little bit. There's been some pent-up demand, and that's really flown through, and you've seen that in our legacy business. So longer term, I think that business will normalize to levels where we were back in late 2019. And the growth drivers is where we've talked about for the last several calls, which is in the value hearing health space in the indirect to end consumer. We're starting to see that business begin to make some strides with the pilot that was conducted here in the late part of the first quarter into the second quarter. And then we'll see even greater momentum as we get draft guidance out there, Andy, and eventually, when we get that final regulation in place.

[Andrew D'Silva:]

Okay. Great. And last question for me just related to the guidance. Should we kind of expect the first quarter -- I mean just looking at -- if you take your guidance and you kind of separate it into four quarters, it would just appear that the first quarter might be the high watermark relative to any other quarter. Is that a fair assessment? Or should we have a little bit more seasonality in the second and third quarter and figure a very strong fourth quarter?

[Scott Longval:]

Yes. Thanks, Andy. And as we talked about, we're anticipating seeing maybe a slight pullback in the second quarter from where we are in the first quarter, and then a progression of growth through the remainder of the year where Q4, in all likelihood, will be above what we saw in the first quarter. So I think that's a natural progression for the rest of the year beginning in the second quarter.

[Operator:]

Your next question is from Jon Block of Stifel. Jon, your line is open.

[Jon Block:]

Scott, I'll just start on sort of the revenue gross margin dynamics. So another very nice revenue beat relative to our estimates and ahead of awesome gross margins but a lot more modestly. So if you could just comment sort of that, if mix shift is still weighing on gross margins a bit, when we think out longer term, is it still really that revenue and revenue increase driving the gross margins longer term and even if you're willing to maybe put on an out-year gross margin number for us to think about?

[Scott Longval:]

Yes. Thanks, Jon. So thinking about the gross margin, some of the challenges that we've outlined, clearly, direct labor has been a challenge in this environment. That's driven some inefficiencies in the cost of sales line. The amount of overtime that we ran in the first quarter was significant because the demand's up. And frankly, some of the churn that we've had within our direct labor has increased really towards the end of 2020 and into 2021. So we're putting in and taking measures to remedy that, and early indications would suggest that we'll be able to resolve that in the back half of the year. But that has caused some constraint on the gross margin line. We'll continue to see that, Jon, in the second quarter, some of those challenges. But as we kind of get our handle -- a handle around some of the -- reducing the overtime and getting more people on board and less churn, I think you'll begin to be able to correlate our revenue growth more succinctly with the growth that we'll see on the gross margin line.

[Jon Block:]

Okay. Very helpful. And sort of a follow-up to that is, on previous calls, you gave some details, Scott, around additional responsibilities, if you would, with one of your biggest partners on the medical side and -- that's specific to the packaging and labeling that you were going to bring on. I thought that was a 2H '21 event. Is it still a 2H '21 event? And what about some of these labor supply constraints that you're talking about? Do we have to think about that as you take on more responsibilities as an organization? Sorry, one more, just as an offshoot to that same question. What's the like-for-like ASP increase? In other words, if you were doing similar volumes for that same said partner with the packaging and labeling, what does it do from sort of an ASP perspective?

[Scott Longval:]

Yes. So within the packaging labeling on those products, it's not all products. It's certain products going to certain geographies. So we'll see ASPs increase roughly 10% to 12% on those products going into certain geographies. We've started to recognize some of that revenue here early in 2021. We think that's going to ramp more quickly in the back half of the year as some of these new products get potentially and hopefully approved. But in terms of labor, look, this is -- one of the things that we're focused on is making sure that we can get the qualified labor in place to meet that demand. And so that's one of the challenges that we've outlined. And I can tell you, it's one of the highest priorities that we have going on. And this is not a problem unique to IntriCon. But I think with some of the measures we're taking and ways to attract and retain employees, that as we move into the back half of the year, we will be in a strong position, and these labor constraints won't have the type of impact that we're seeing now.

[Jon Block:]

Okay. And last one or two for me. Just first of all, on the IDTEC, any additional color you're willing to share? Or maybe just when we think about the model longer term, how does the margin structure work out in that regard? In other words, DTC was always a much higher gross margin relative to corporate. With what you're experiencing from these pilots and the way that the structure is working out and the support you're giving, do we think about the IDTEC as accretive to corporate gross margin? And sorry, last one, to walk back the 10% to 12% higher ASP that you mentioned because of the packaging and labeling, how do we put that in the construct of the overall guidance this year, right, which might imply, I don't know, around $60 million in 1H and $50 million in 2H, give or take, but yet the higher ASP, do we just view that as maybe a sense of conservatism?

[Scott Longval:]

Yes. Very good questions. So on that last point, in terms of how we think about the back half and the first half, remember, it's just on select products that are going to this customer. And because we aren't positive or assured of the timing of when some of these launches will be, we didn't want to bake much into the back half of the year on that front.

[Jon Block:]

Okay. And I'm sorry, I rambled for a while, but just the margin structure on the IDTEC long term, Scott?

[Scott Longval:]

Yes. Yes. Thank you. So Jon, within the IDTEC, and we think about the OTC market, I envision there's going to be several channels and several ways that IntriCon participates. But I will say, within the pilots that we have and the opportunities that we have in front of us, we're going to see a margin structure and a financial makeup similar to kind of our corporate averages, where gross margin should be in the low 30s, operating expenses in the 20s and ultimately giving us profitability in the 10% range. Now obviously, there's a lot of work that needs to be done to get to those -- the volumes that will support those margins. But long term, that's how I see we'll be participating in the OTC market, which to your point, was a departure from the DTC effort that we were doing down at HHE.

[Operator:]

Your next question is from Kyle Bauser of Colliers Securities. Kyle, your line is open.

[Kyle Bauser:]

So maybe I'll start with EMS, just come in well above expectations and you already anticipated, at the time of the acquisition of it, being very accretive. Can you talk again about the growth profile? I think you mentioned 15% quarter-over-quarter growth, but I'm not sure that, that applied just to the EMS line or if that was more a Medtronic-related staff? But just kind of trying to understand how we might model this over the coming quarters so any sort of growth profile expectations would be great.

[Scott Longval:]

Yes. So within EMS, the quarter-over-quarter growth in their total business was 12%, and again, doing a fantastic job as they're meeting demand coming in from Medtronic but also other customers alike. Our goal there is to continue, obviously, to serve Medtronic and be the best partner we can be. But as I highlighted, it's important for us to figure out how do we take the Emerald technology, the Emerald abilities and confidence they've built with Medtronic, and be able to take IntriCon's financial stability and go out and sell those competencies in other -- with other customers -- in other regions of the world. And so that's one of the things that we're focusing on right now is building those partnerships over in Asia that can leverage some of the capabilities that we have at Emerald. And I think those will be important growth drivers for us as we look out a year, two, three years.

[Kyle Bauser:]

Got it. And maybe switching to OTC guidelines and to us continuing to wait for the FDA. Just kind of curious, how have you -- how would you characterize the willingness of potential partners in this space to move forward with at least just maybe discussions? And given the ongoing pilot programs and your success today, just kind of wondering if those conversations have continued to develop? Or if we're still kind of in a holding pattern here?

[Scott Longval:]

Yes. And I'll answer that on two fronts. So I think with the OTC, what we saw in 2020, we saw the conversations simmer a little bit. And I think most of the large entrants or people that were working at that market again took a deep breath and sort of looking internally in the business that they were already engaged in. Now that we're starting to see the COVID cloud lift, we are seeing more potential partners engage. Obviously, we announced the pilot with hearX here in the first half of the year and there's others that we're in collaboration with and discussion with. So I would say today, there's more activity, Kyle, than I've seen over the last couple of years in terms of discussion and collaboration.

[Kyle Bauser:]

Great. Appreciate that. And just lastly, so can you talk a little bit about the hiring constraints, supply constraints? What -- I'm just curious, what is the latest headcount? And how many positions do you have open or would you ideally fill over the next, call it, three to six months?

[Scott Longval:]

Yes. So that's a pretty broad question. We have roughly 850 employees. Now a number of those are international employees. And where we're seeing the greatest constraint is here in the U.S. market and specifically, our three manufacturing facilities in Minnesota. So we have over 200 direct labor here in Minnesota, closer to about 280. And we would like to add anywhere from 10% to 20% over the course of the next quarter. That's quite a bit in term -- in terms of trying to find skilled labor. But again, we've adopted some new techniques, and what we're seeing from early returns, I think we'll be in a good position in the back half of the year.

[Operator:]

At this time, I would like to turn the conference back to Mr. Scott Longval for any further comments.

[Scott Longval:]

Great. Thank you, everybody, for joining on the call today. I appreciate your time. We look forward to giving you updates as we move throughout the year. Stay healthy. Have a good night.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.