IntriCon Corporation
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Ladies and gentlemen, welcome to the IntriCon First Quarter 2015 Results Conference Call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Scott Longval, Chief Financial Officer. Please go ahead sir.

[Scott Longval:]

Thank you, operator. Joining me on today’s call is Mark Gorder, IntriCon’s CEO. Before we begin, I’d 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 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. Important factors that could cause such differences include amongst others those set forth under the headings Risk Factors, and management’s discussion and financial – analysis of financial condition and results of operations and our 10-K filing for the year ended December 31, 2014. With that, I’d like to introduce Mark for a strategic look at IntriCon’s first quarter.

[Mark Gorder:]

Thank you, Scott, and thank you everyone for joining us today. I would like to begin by reviewing key highlights and results for the first quarter. After that Scott will cover the financials in more detail and then we’ll take your questions. By this time, most of you have had a chance to review our first quarter press release. For the quarter, we reported revenue of $16.6 million, and earnings of $0.05 per share, both in line with our previously stated expectations. In addition to the solid financial results, we’ve made great strides during the quarter advancing our strategic initiatives. Looking at our three businesses, sales in our hearing health business decreased 5% from the prior year quarter, primarily due to declines in the conventional hearing health channel. This was partially offset by gains and targeted value hearing health initiatives including hearing aids, personal sound amplifier products and assisted listening devices. Shortly, I will comment further on our efforts to support the emerging outcomes-based hearing health model. Our medical business sales declined 6% in the 2015 first quarter, primarily due to the anticipated reduction in sales to our largest customer, Medtronic. To support Medtronic’s MiniMed 530G insulin pump launch in late 2013, we built and sold significant inventory from the fourth quarter of 2013 through the first half of 2014. While Medtronic volumes were down year-over-year, we experienced sequential revenue growth of 29% from the 2014 fourth quarter. And based on current demand we anticipate – we continue to anticipate sequential Medtronic revenue gains throughout 2015. Looking at our professional audio communications business, sales rose 6% from the prior-year period. We will continue to leverage core technologies in professional audio communications to support existing customers as well as seek related hearing health and medical product opportunities. I’ll now briefly touch on other key initiatives, most notably in value hearing health. We believe along with other industry professionals and consumer groups that the current retail model does not meet the needs of a vast majority of the hearing-impaired population. The high cost of hearing devices, inconveniences and inefficiencies in the conventional channel and retail consolidation have resulted in lower sales and a stagnant penetration rate of hearing devices in the U.S. market. These factors have created the need for an outcomes-based hearing healthcare model, requiring the best value added devices in software technology along with varying levels of practitioner intervention to provide the most efficient lowest cost solution to the individual consumer. We believe this model will significantly improve market penetration bringing hearing healthcare to millions of people, who today cannot afford care through the conventional channel. We have positioned IntriCon as a leader in this emerging hearing healthcare model through ongoing investments in sales, marketing and research and development. Through our partnership with PC Werth, we anticipate having product approved and available for sale to the UK based National Health Service during the second quarter. The NHS is widely seen as the most efficient hearing aid delivery system in the world. They supply an estimated 1.4 million hearing aids annually. We’re well positioned to serve their needs and we’re developing new technologies to further enhance delivery efficiencies and product standards in the future. In addition to our current partnerships and customers, we are aggressively presuming perspective partners and customers to expand the outcomes-based hearing healthcare model. We anticipate securing and announcing a few more notable partners in 2015. Our steadfast commitment to value hearing health is focused on long-term value creation. This commitment does not come without a price. Today, we are making an annual investment in excess of $5 million to support value hearing health infrastructure, technology, and solutions. Well value hearing health revenue generation today does not material, we believe these investments will drive long-term shareholder value. Moving on, during the first quarter we amended our credit facilities with the PrivateBank. The amendment includes an increase in IntriCon’s term loan to $5 million from the current balance of $1.75 million, an increase in the annual capital expenditure limit to $4.5 million, and the implementation of investment provisions allowing for up to $4 million in investment spending prior to requiring bank approval. The amendment with the PrivateBank provides the financial flexibility to support value hearing health and medical biotelemetry growth initiatives and related core technology development. We’re currently evaluating a number of opportunities. Now, I’d like to turn the call over to Scott.

[Scott Longval:]

Thank you, Mark. I’ll begin by reviewing our first quarter financial results in more detail. In 2015 first quarter, the company reporting net sales of $16.6 million, compared to $17.3 million in the prior year period. IntriCon posted net income of $284,000, or $0.05 per diluted share, versus net income of $517,000, or $0.09 per diluted share for the 2014 first quarter. Included in the 2014 first quarter results was a net loss from discontinued operations of $270,000, or $0.05 per diluted share. Gross profit margins were 26.1% compared to 27.6% in the prior year first quarter. The decrease was primarily due to overall sales volumes partially offset by a more favorable product mix. First quarter income tax expense of $155,000 increased $128,000 over the prior year comparable period. The increase stemmed from a foreign tax income expenses. The company is currently in a net operating loss position exceeding $22 million for U.S. federal and state income tax purposes and therefore we expect minimal tax expenses in the U.S. this year. Turning to other financial metrics; as Mark previously mentioned, we amended our credit facilities with The PrivateBank, improving our liquidity and financial flexibility. Further, we generated approximately $1.2 million in positive operating cash flow during the first quarter, up 27% over the prior year period. Our total cash cycle days at the end of the first quarter were 65. This was an increase from 52 days at the end of the comparable prior year period and consistent sequentially with the 2014 fourth quarter. Cash cycle days were comprised of days sales outstanding, which stood at 41 plus days sales and inventory which was 73 days at the end of the first quarter, plus days payable outstanding which stood at 49 days. All now it was a solid first quarter for IntriCon, but met our expectations. Now, I’d like to turn the call back over to the operator, so we can take any questions.

[Operator:]

Thank you. [Operator Instructions] And we will go first to Dick Ryan with Dougherty.

[Dick Ryan:]

Thank you. Good afternoon Mark and Scott.

[Mark Gorder:]

Hi, Dick.

[Scott Longval:]

How are you doing, Dick?

[Dick Ryan:]

Good, good. First, Scott, just a couple of housekeeping, could you have stock comp and depreciation in the quarter?

[Scott Longval:]

Yes. So, stock comp for the quarter was about 170,000 and depreciation was about 4.25.

[Dick Ryan:]

Okay. And looking at the gross margin line, a little softer, not – totally kind of unexpected, but how should we look at that going forward as you view kind of the mix going through the rest of the year?

[Scott Longval:]

I would expect the margins to increase throughout the year and a little softer at 26.1%. So, I would anticipate that to show a sequential growth throughout the year.

[Dick Ryan:]

Okay. So, Mark, can you talk a little bit more on the approval process over in the U.K. What’s left and what’s PC Werth take on the opportunity, I know you obviously spent the lot of time but then can you give us a little perspective on how you see there the product rollouts in 2015 here?

[Mark Gorder:]

Sure. The PC Werth is very bullish on the opportunity with the NHS as you and I’ve discussed in our past conversations that they have a very good relationship developed over many years with NHS. And we are in the final stages of getting product approval and getting the logistic setup and we expect that by the end of the quarter. We’ll be shipping product to the NHS. In relative to the rollout speed, it’s going to take some time because you have to. Once you’re on the framework then you have – PC Werth then has to get in and start pushing the product into all the various clinics. And so we anticipate that we’ll start somewhat slowly in that, we have that prime the pump get products into all the clinics. And then hopefully that gets a positive result and then we can accelerate pushing product into the clinics by the end of the year. So I could anticipate some of slow rollout in Q3 and acceleration in Q4.

[Dick Ryan:]

Okay. And one more from me. You spent some time on the value side the indicating you anticipate some partnerships developing there. What’s pushing the lever there, is that something you guys need to do more of or is that rest more with your partners. Can you kind of give a little sense of what drags the value hearing progression?

[Mark Gorder:]

Well that’s a great question. And of the things that we’re seeing is an acceleration in events in the marketplace, so it indicate it’s a value market is emerging. And even in the last quarter, we have – we are picking up information that tell us that trends in both the U.S. and now even in Europe indicate that acceptance of a value proposition is more and more acceptable in the marketplace. And so we’re trying to work with several groups, we’re trying to engage the professional, we’re also looking at other channels to get products like the personal sound amplifiers and TV streamers direct to the consumer, things like that. And we think that, in the case where we are working with partners, its – we’re more depended on the partner but there are some opportunities we think that where we can move it and get more direct control over a channel. So we’re exploring all of those and we expect you’re going to see from us some positive announcements over the next two to three quarters.

[Dick Ryan:]

Does this start domestically or international, could international take the lead on us?

[Mark Gorder:]

It’s going to start domestically, our best engagements and that was the programs were farthest along are in the U.S., however, we anticipate that follow quickly on the heels of growth[ph] to be an opportunity or two in Europe. That might be a little bit longer or that might be three or four quarters up, but there will be European opportunities to follow quickly on the heels of the U.S. opportunities.

[Dick Ryan:]

Great, thank you.

[Operator:]

Thank you. Our next question will come from [indiscernible].

[Unidentified Analyst:]

Yes. One quick question. There is a little discussion of the heart monitoring and other medical telemetry products for about a year now. Back in July last year you said that the cardiac monitoring should contribute the sales in 2015 with a large Tier-1 cardiac diagnostic monitoring customer. In February, you came out and you said you expected to fill in the little more debt for the next two quarters as you make a sizeable investment in hearing and medical telemetry. You made a similar statement today about the telemetry. In 10-K you said that the company has contracts in place with lead customers for the Sirona and anticipate to expanding that customer base, during the first quarter of 2015, you also made a brief mention of a sleep apnea product. What can you tell us about the status and prospects for this market?

[Mark Gorder:]

A good question, Bert. We are making very good progress in the cardiac market although it’s still not a large revenue producer we have substantial year-over-year growth in cardiac in 2014 versus 2013. And we are off to a great start in 2015, in fact, we had a record month of revenue in the first quarter for our cardiac unit. And we booked a number of new customers and we’re introducing a number of product variations during the next couple of quarters. And we anticipate very good year-over-year growth in that cardiac market this year although it’s not a big revenue contributor from the standpoint and none of our large customers are in there. It’s very good margins and we are getting very good growth and it’s a great foothold for us in the bio-telemetry market.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions] [Indiscernible] Please go ahead.

[Unidentified Analyst:]

Hi, I think Bert just answered – just asked my question, but I appreciate that Bert. But I just wanted to mentioned that I bought my first set of hearing aids. And I went out and I looked for a product that was made by IntriCon, and I have found one. And I found it today, very good set of hearing aid and I’m very satisfied with them and I did find them a little bit complicated for the – usual user hearing aids that is I bought them from an outlet in Utah called Clearflex. And it came with a pad that needs, that I can program on myself. All the hearing aids that are in the lower price, are they all pre-programmed, are they all, are they going to be pre-programmed or they are all programmed by the user? And a little more complicated for the user to set up like mine is for an uninitiated person to handle. In other words you need to know lot about hearing aids in order to purchase a hearing aid, - a lower price hearing aid or is going to be similar to, going to the regular store and picking on up, just with the full service that you can get, because mine is basically [indiscernible] myself.

[Mark Gorder:]

Ken I’m not familiar with Clearflex but I can speak generically about the hearing aids that are in the value segment. There is basically two ways, the first is sound amplifiers are sold without any programming or professional services and they could be obtained usually by direct mail or by on the Internet or in some cases by direct order. But the basic difference between a good personal sound amplifier and a basic hearing aid is the presence or lack of professional services. The quality of the device is usually just as good on the personal sound amplifier as the hearing aid, in fact there was an interesting study that was just published by the – it was founded by the National Institute of Health and it was conducted by a researcher Robin Cox he was well known and respected in the industry. And they basically found that between the basic hearing aid and the real high end hearing aid with the consumer can all – cannot really detect any outcome based performance that’s add the significant benefit to the hearing impaired. And so I think usually the devices that are sold are this PSAPs are not programmed. So some kinds it can be – you can’t really tailor the sound for your particular hearing loss. Because they can’t be sold to address hearing off. So the only way to get a device program for hearing loss is to engage a professional to do that. Now sometimes in the mail order or the direct-to-consumer, they – I think there is one company called MD Hearing that I believe will actually make programs and adjustments based on a questionnaire with the consumer is fills out on purchase. So it varies and I think, the – when you get a device that’s a little bit more complex sometimes the only way is to engage your professional to get some help for that. But most of the personal sound amplifiers are relatively simple. But I’m not familiar with ClearFlex, so I really can’t comment specifically on how that device is adjusted. But I’ll look into it. And if you want to give me a call, we can discuss it.

[Operator:]

And we’ll go on to our next caller Scott Billeadeau with Walrus Partners. Please go ahead.

[Scott Billeadeau:]

Hey, guys. Thanks for taking my question. A couple of things one I’m wondered if you could discuss a little bit within the value hearing market. I know you’ve talked in the past about trying to whether engage or create an insurance product out there and had a couple of machinations with United. I’m wondering if you could update is there on what’s going on that front. And then secondly is – given the investments you’re making, are those all running through the income statement now or do you have to capitalize some of the things until PC Werth starts to execute or some of the other partners start to execute maybe you could give us a little update there?

[Mark Gorder:]

I think, I’ll take the last question first. If you see we expand just about everything that we are talking about there in that $5 million, it tends to be R&D. New technologies that we are developing to attack the value market, things like wireless connectivity, where we had a couple of radio technologies we’re developing to bring out products with enhanced connectivity to improve the performance in the channel or consumer satisfaction. And then there is marketing infrastructure that we’re putting in with couple of ventures that we haven’t announced yet. But they’re well along the road. So all those are basically expense related. And back to the value side, relative to insurance. United is really the only player that stepped up to create an insurance model. To-date there is no – for example if you going to federal Medicare there is no federal Medicare reimbursement. There is some state medicaid reimbursement, it exists state by state but a very significantly. And there are no players that have really stepped up with a well-defined program in the value space to address an insurance model other than United. But we think the opportunity there is significant and we’re trying to find ways to do that we trying to find the right partners to do that with. And we think we’ll make progress on that. But to-date it’s basically United and then there is some state medicaid type insurance and occasionally employers will have insurance policies that will include hearing aids but it’s very sporadic and it’s not a wide spread type program. Did I answer your question?

[Scott Billeadeau:]

Yes, no, yes. I would just trying to figure out it to have much for expectations there and I think they are still trying to figure out what model works?

[Mark Gorder:]

We think there is great expectations and we think that the – at medical unbundled model with an insurance backing is what happen at some time, it may take a while but that’s the direction that it’s heading.

[Scott Billeadeau:]

And then one more question, I think Scott has mentioned that – margins that sequentially kind of improved relatively is that driven by how much of that is mix a dollar I think you mentioned on the press release that mix was already favorable and it’s just absorption, it’s a top line story and suppose to mix, could you kind of give us a little fuel there?

[Mark Gorder:]

Yes, that’s true Scott. The primary driver of – little more favorable margin that we’ll see is based on volume. So that will cover that absorb a lot of that overhead to serve our volumes begin to increase throughout the year.

[Scott Billeadeau:]

Yes.

[Scott Longval:]

There is a very little impact on mix from quarter-in to quarter-out, percent here and percent there but the….

[Scott Billeadeau:]

Okay.

[Scott Longval:]

80 to 20 is kept in the volume.

[Scott Billeadeau:]

And then on the couple of the partners you see going forward we may see a few partners in the next two to three quarters over there – or they essentially distribution partners in value hearing I mean as – how would you compare and contrast those potentials to what a PC Werth looks like?

[Scott Longval:]

They’re definitely different than PC Werth, and there I would say there – their distribution channels let get into the value space in a very positive way. Engaging groups that we think in the – have a significant impact either on the personal sound amplifier met market or the hearing aid market – value hearing aid market.

[Scott Billeadeau:]

Okay.

[Scott Longval:]

We’re obviously we can’t talk much about on because they are under NDA and we think they are very positive.

[Scott Billeadeau:]

Great, all right. Thanks guys.

[Scott Longval:]

Thanks Scott.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude our Q&A session. I’d like to turn the conference back over to Mark Gorder, CEO for closing comments.

[Mark Gorder:]

Thank you, operator. Once again we appreciate you taking time out of your day to join the call. We appreciate all the good questions. In closing I’d like to reiterate that well I’m encouraged with the positive start to the year, whereby no means satisfied and financially we intend to build on our momentum and anticipate sequential revenue growth of the second quarter and higher sales for the full year. Strategically we remain focused on our stated goals of aggressively extending our value hearing health reach and pursuing opportunities within the medical biotelemetry market. We’ve made great strides advancing our technology portfolio building our value hearing health infrastructure and securing key channel partners. As the year progresses, we anticipate announcing additional milestones in the few long-term growth. We look forward to updating you on our progress next quarter. And thank you again for joining the call.

[Operator:]

And again ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation. Thank you for calling.