IntriCon Corporation
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Ladies and gentlemen, welcome to the IntriCon Corp.’s Fourth Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Leigh Salvo. Ma’am, 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.

[Scott Longval:]

Thank you, Leigh. Good afternoon. I would like to start by thanking our employees, partners and suppliers that have stuck through us through a very difficult time. Despite the many challenges of 2020, our teams rallied together to support our mission to improve, extend and save lives by advancing innovative micromedical technologies through joint development and manufacturing partnerships. I am confident this unwavering commitment will continue. I would also like to welcome IntriCon’s new CFO, Ellen Scipta, who joins me on today’s call. Ellen brings a unique skill set that blends engineering with extensive financial experience. We are sure she will be a strong financial steward to our team as we continue to expand and advance our global footprint in micromedical technology. On the call today, I’d like to start by briefly highlighting our financial and operation progress in each of the primary medical markets, as well as our priorities for 2021. Ellen will then cover our financial results in more detail then we will open it up for questions. In many ways, 2020 was transformational for IntriCon. We kept our focus on the priorities we established earlier in the year, priorities that we believed would best enable us to leverage our core strengths into diversified, high growth medical markets, and we see 2021 as a year of ongoing progress and execution. Key accomplishments in 2020 included the acquisition of Emerald Medical Services, or EMS, which expanded our market opportunity in surgical navigation and provided us with immediate access to a technology platform serving new high-growth medical end markets with complex interventional catheters. We also bolstered and diversified our leadership team with the addition of a new board member and several key executives with rich sector-specific experience in their respective fields. With advancements in our business also came organizational changes that enable us to better and more quickly pursue attractive development opportunities and key partnerships. We also kept a keen eye on our expenses and balance sheet in order to navigate through the unprecedented landscape of 2020 in order to maintain our solid financial footing. We also closely managed the resources needed to ensure we could emerge in a position of strength in the current and new medical markets. As a sign of our evolution as well as our renewed commitment to our vision, we recently completed an extensive re-branding effort that incorporated an enhanced website for the publication of our environmental, social and governance policies that are critical in demonstrating the corporate responsibility to our employees and our shareholders. These policies are included in a new Corporate Responsibility section of our website.

[Ellen Scipta:]

Thank you, Scott. It is a pleasure to join such a great company with incredible people and a history of innovation and excellence. As Scott mentioned in his prepared remarks, we have a number of growth opportunities ahead of us and I very much look forward to delivering finance partnerships that will allow us to exceed those goals. Now turning to our financial results, for the 2020 fourth quarter, we reported net revenue of $30.3 million, an increase of 9.4% over the prior year period. This increase was primarily due to our medical and Hearing Help legacy OEM product line. Core business revenues in our medical market for the quarter were $23.9 million, a 12.2% increase year-over-year and represented 79% of the total revenue, which is slightly more than the prior year due to our EMS acquisition. Again, this increase was largely driven by the $3.4 million revenue contribution from EMS, which the company acquired in May of 2020. In our Hearing Help business, the total revenue in the fourth quarter was $5.1 million, up 4.8% over the prior year fourth quarter. We did see upside due in part to renewed access to audiologists and solid orders from our indirect-to-end consumer customers. More specifically within Hearing Help, indirect-to-end consumer revenue was $1.5 million, direct-to-end consumer revenue through our Hearing Help Express business was approximately $900,000, and legacy OEM revenue was $2.6 million. Fourth quarter gross margins were 25.7% compared with 26.9% in the prior year comparable period. The lower margin was primarily due to product mix. Operating expenses for the fourth quarter were $6.8 million compared to $6.7 million in the prior period. The slight increase was due to approximately $500,000 in EMS operating expenses and a $400,000 expense related to an increase in fair value of the EMS earn-out liability, partially offset by cost reduction initiatives implemented in 2020 second quarter. We posted a net income attributable to shareholders of $1.1 million, or $0.12 per diluted share versus a net loss attributable to shareholders of $768,000, or $0.08 per diluted share for the 2019 fourth quarter. For the full year ended December 31, 2020, IntriCon reported a revenue of $102.8 million, a decrease of 9.4% compared to $113 million for the year ended December 31, 2019. Gross margins were 25.5% compared with 27.3% in 2019. The decrease was primarily due to pandemic-driven volume reduction and shift in product mix, partially offset by cost reduction initiatives I noted earlier. Operating expenses were $29.3 million compared to $33 million in the prior year. The change in operating expenses year-over-year was due to cost reduction initiatives partially offset by $1.5 million in EMS operating expenses, $660,000 of expense-related increases in the fair value of the EMS earn-out liability, and approximately $800,000 in costs associated with the CEO transition agreement signed in June of 2020. Net loss attributable to shareholders was $2.5 million or $0.28 per diluted share versus $3.8 million, or $0.43 per diluted share in 2019.

[Operator:]

Thank you. Your first question comes from the line of Mr. Jon Block from Stifel. Your line is now open. You may ask your question.

[Jon Block:]

Thanks. Good afternoon. Ellen, welcome and Scott, hope all is well. I have got a small handful, maybe three or four, and then I’ll get back in queue. But the revs were up a good amount 3Q to 4Q. Gross margins were down just a bit sequentially. And I know you’re not giving guidance, but is there a high-level discussion on the revenue and gross margin relationship? In the past, it was thought that gross margin expansion, if you would, would be directly tied to the revenue growth. I know there is moving parts and mix shift, especially now with EMS. But can you talk to if one is going to lead to the other, if there is an update on that dynamic? Thanks.

[Scott Longval:]

Yes, Jon, thank you for the question, and good to talk to you. So we’ve long talked about the fact that, as we drive revenue, we will see that fall through on the margin. And I don’t think this quarter, while there is a little bit of a disconnect there, changes that overall thought process from our level. We’ve made a couple of additional investments in the fourth quarter. We had a little bit of a mix shift in the fourth quarter. But overall, we’re very confident, as we drive the top line, we will see margin improvements. So nothing changes from that perspective.

[Jon Block:]

Okay, great. And then, Ellen or Scott, just your thoughts on Medtronic’s robust pipeline, your partner’s robust pipeline. And Ellen, you talked a little bit about some expectations just directionally on revenues throughout 2021. Does that assume any approvals from your partner? Does it assume U.S. 780G just being a contributor there or no and that’s more thought of as a 2022 event? And then I have got more than a half more questions.

[Scott Longval:]

Yes, yes. Good questions. Look, I am sure you got a chance to look at Medtronic’s results from the other day, and they were very optimistic about both the 780 and the 770 internationally and hosting insulin pump starts with market share gains, which is fantastic, clearly for us. If you look at the feedback that they’re getting on the 770, I think that speaks volumes to where they believe that business can go. In addition to those pump systems, taking hold and addressing some of the consumer delights. It does also help that they can get out and begin to engage patients in ways that they couldn’t over the last couple of quarters due to COVID. So I think just kind of that natural COVID cloud lift, along with the additional functionality and technology in these new systems bode well for us in 2021. And then, as we look towards kind of the back half of the year, we will be doing some additional steps as part of the manufacturing process, more focused on packaging and labeling that will provide a small lift for us on this business as well.

[Jon Block:]

Great, great. I will sort of bundle my last question. So, the quick one is the coil commentary on capacity constraints, are those loss revenues or more just a push into maybe 1Q or 2Q ‘21? And then the bigger question, it’s great to hear about some of the pilots, Scott that you mentioned on the hearing side of the business. Are there any more details you can provide, the size of the pilots, the types of partners? Are they leveraging your back office, if you would, on the DTC support side? And will these be revenue-generating events for your DTC division? Thanks, guys.

[Scott Longval:]

Yes. I’ll start with the first question, some of the capacity constraints we had on the coil side. This is more push revenue that you’ll see us pick up in the first and most likely more in the second quarter of 2021. We work through some of those. In terms of the pilots, this is a progression, Jon, of what we’ve been talking about. We have been preparing ourselves for this OTC market. We’ve had a lot of discussions with a number of different potential partners, and we’re now getting to the point where we’re preparing for pilots. These pilots, though, I will tell you, are more to garner information on the market than they will be notable revenue drivers in 2021. We mentioned that we want to test the end market. We want to understand what that post-sale engagement is going to require. And our partners are trying to identify the right price points. So I think, if you look at the pilots in 2021, I would think of more of them in terms of development – channel development that will lead us to gather information. So when we look to scale when the OTC regulation is finally passed, we’re in a position to do that. In terms of what we’re going to offer, it depends on the pilot, frankly. So clearly, our hardware and software and firmware will be in each of the pilots. But in a few of them, I anticipate, we will have our back office supporting these pilots as well and primarily because, clearly, the only way you can do it in a pre-OTC market.

[Jon Block:]

That’s great color. Thanks guys.

[Scott Longval:]

Thanks, Jon.

[Operator:]

Thank you. Next question comes from the line of Andrew D’Silva from B. Riley Securities. Your line is now open. You may ask a question.

[Andrew D’Silva:]

Yes, good afternoon. Thanks for taking my questions. And Ellen, pleasure to meet you. Just to get started, I just have a couple of quick bookkeeping questions, if somebody could just let me know stock-based comp, depreciation, amortization, cash flow from operations and CapEx were for the full year. And while that’s getting pulled for the period, I am just curious, for the first quarter of 2021, should we model in any one-time expenses, either related to recruiter fees or other unusual earn-outs or one-time events like that?

[Scott Longval:]

Nothing significant or material, Andy that I would factor into your first quarter modeling. In terms of some of the housekeeping items, depreciation and amortization for the quarter was $1.3 million, stock-based comp, $338,000. Cash flow from operations was $4.4 million and fixed asset purchases, $771,000.

[Andrew D’Silva:]

Okay, perfect. Thank you for that. And then, I did have a few diabetes-related questions and a couple of hearing aid ones, as well. Just as it relates to the manufacturing facility that you effectively finished but we are waiting for quality and certification process to finish, could you give us an update on really where that stands and are you now having the automated sensory assembly operating yet?

[Scott Longval:]

Yes. We do have the first system up and running. We are still working through some of the efficiencies on that system, but it is up and running and producing parts.

[Andrew D’Silva:]

Okay. Okay, great. And it was good to see the uptick in the diabetes sales. Obviously, you highlighted the 770, 780 launches with Medtronic. I am curious, as you think about the Zeus CGM sensor it’s still in the approval process. How do you see Zeus changing dynamics as it relates to 780G, specifically related to your business?

[Scott Longval:]

Yes. I think that’s a very good question. While we are very excited about the 780G and the 770G and the functionality with Bluetooth and to handhelds, one of the areas that continues to be a gripe is the number of calibrations that’s required on the current systems. And the Zeus platform addresses that, so moving away from multiple calibrations a day and bricking the finger to a solution that requires a one-time at the beginning of use calibration. And I think that customer delight is something that’s going to go a long way in Medtronic earning back the market share that’s eroded over the last couple of years. And clearly, being the sole provider and manufacturer of record of that continuous glucose transmitter that puts us in a very strong position as they work through the approval process.

[Andrew D’Silva:]

Okay, that’s good to hear. And since you just referenced the transmitter, just stimulated one other thought with the diabetes side. As it relates to the 670G business, are you seeing a transmitter renewal? Basically, they went past the 2-year point and patients are starting to order at least a second transmitter at this point or does that have any sort of benefit for you during the quarter? It was just somewhat materially above what we were looking for?

[Scott Longval:]

Andy, it’s hard for us to get down that level of detail. Really, all that information resides with the customer. We’re in a position to meet the volume demands that they require. And so it’s hard for me to comment specifically on what those replacement GST volumes look like.

[Andrew D’Silva:]

Okay, okay. And just last question for me is on the hearing health side, you were referencing some of your pilots utilizing the back office for the DTC capabilities before the OTC regulations are in place. Could you just talk about how that all works, in your view, once the OTC regulations are in place? Is that something we should expect to be curtailed away and you’re going to go back to kind of your core focus where you’re not really providing any of that back-end support or is that going to be part of the business, going forward? And really, why I am interested in that is, obviously, because you’re going to pursue the self-fitting software still. And that seemed very applicable if you were going to maintain the back office for a significant period of time?

[Scott Longval:]

Yes, absolutely. And clearly, that self-fitting software is a critical element to providing the ecosystem of care that’s going to be required for this channel. As it relates to the back office, it’s going to be an important part of our business, going forward. And it’s going to be an important part of our business. I think it’s going to take on a number of different forms. Our ability to ship N equals one is very important. And there is a number of partners that are going to want us to have that capability, to be able to send products in a box directly to an end consumer. They are also going to want us to be able, in some instances, to provide support, if necessary. And so I think it’s important that we continue to be able to offer that to our customers, especially as we’re going through this period of time of letting the market really define what it’s ultimately going to look like. So I think we are in a really good position. Those are our skill sets as part of the Hearing Help acquisition, and we’ve been able to do that and run it at a very low cost basis.

[Andrew D’Silva:]

Okay, perfect. Thank you very much for the time. And congrats on the progress in the fourth quarter and good luck going forward.

[Scott Longval:]

Thanks, Andy. Have a good day.

[Operator:]

Thank you. I am showing no further question at this time. I would now like to turn the conference back to Scott, sir.

[Scott Longval:]

Great. Thank you, everybody, for joining us on the call today. We look forward to continue updating on our progress throughout 2021. Be safe, and have a great evening.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for participation, and have a wonderful day. You may all disconnect.