IntriCon Corporation
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good day and welcome to the IntriCon Second Quarter 2015 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Scott Longval, Chief Financial Officer. Please go ahead.

[Scott Longval:]

Thank you, operator. Joining me on today’s call is Mark Gorder, IntriCon’s CEO. 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 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 analysis of financial condition and results of operations and our 10-K filing for the year ended December 31, 2014. With that, I would like to introduce Mark for a strategic look at IntriCon’s second 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 second quarter. After that, Scott will cover the financials in more detail and then we will take your questions. By this time, most of you had a chance to review our second quarter press release. For the quarter, we reported revenue of $17.1 million and earnings of $0.08 per share both in line with the analyst expectations. In addition to the solid financial results, we made great strides during the quarter advancing our strategy to drive business in value hearing health business by solidifying in another prominent partner, AudioNova to deliver high-quality low-cost hearing devices to the European market. Looking at our three businesses, sales in our hearing health business decreased 12% from the prior year quarter primarily due to one-time declines in the conventional hearing health channel. This was partially offset by gains in targeted value hearing health initiatives. While hearing health sales are down from prior year, we remain focused on building the infrastructure required to secure other notable partners in the second half of 2015 and beyond that can benefit from the outcomes based hearing health model we offer. We do anticipate year-over-year hearing health sales gains in the second half of 2015. These will be driven by the anticipated ramp up of our new value hearing health programs. And shortly, I will comment further on our efforts to support the emerging outcome based hearing health model. Our medical business sales increased 8% in 2015 second quarter primarily driven by sales to our largest customer, Medtronic. Our Medtronic business posted record quarterly revenue led by the MiniLink real-time transmitter and related accessories, which are incorporated in Medtronic’s MiniMed 530G insulin pump and continuous glucose monitoring, or CGM system. We also manufacture various accessories associated with Medtronic CGM System, including the recently announced MiniMed Connect, which links the MiniMed pump and CGM to certain smart devices providing users with a discreet and real time view of their blood sugar information. We anticipate Medtronic revenue gains throughout 2015. Looking at our professional audio communications business, sales declined 16% from the prior year period. The decrease was anticipated and related to the conclusion of our Singapore government contract in 2014. 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 will 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 conventional 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 outcome based hearing healthcare model. It demands the best value-added devices and software technology along with varying levels of practitioner intervention to provide the most efficient low 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. As previously stated, we attained another notable milestone during the quarter. We secured a 2 year supply agreement with AudioNova International, one of Europe’s leading hearing aid providers operating more than 1,300 retail stores in 11 countries. Through our new supply agreement AudioNova will offer hearing devices manufactured by IntriCon. AudioNova’s smartsound brand is based on IntriCon’s Audion amplifier and offers technically advanced features at value hearing health price points. AudioNova has begun roll out of the smartsound brand in the Netherlands and intends to expand the program to other targeted European countries in the future. We expect to begin shipping product in the third quarter. Furthermore, we continue to work with the United Kingdom’s National Health Service or NHS on product approval. Just this week, we have received correspondence from the NHS Audiology Supplies Group that they have completed their evaluation of our products and software. While we have yet to receive formal feedback, we are pleased with our products and software performed during the evaluation and we are encouraged by the informal feedback. We anticipate formal feedback in the third quarter. The NHS is widely seen as the most efficient hearing aid delivery system in the world supplying an estimated 1.4 million hearing aids annually. We believe IntriCon is well positioned to serve their needs and we are 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 pursuing prospective partners and customers to expand our outcomes based hearing healthcare model. We anticipate securing and announcing a few more notable partners in the second half of 2015 and beyond. Now, I would like to turn the call over to Scott.

[Scott Longval:]

Thank you, Mark. I will begin reviewing our second quarter financial results in more detail. In the 2015 second quarter, the company reported net sales of $17.1 million, compared to $17.5 million in the prior year period. IntriCon posted net income of $506,000 or $0.08 per diluted share versus net income of $813,000 or $0.13 per diluted share for the 2014 second quarter. Gross profit margins were 26.8% compared to 27.3% in the prior year second quarter. The decrease was primarily due to lower overall sales volumes. For the 2015 six-month period, IntriCon reported net sales of $33.7 million and net income of $790,000 or $0.13 per diluted share. This compares to 2014 six month net sales of $34.8 million and net income of $1.3 million or $0.22 per diluted share. Included in the 2014 six-month results was a net loss from discontinued operations of $270,000 or $0.05 per diluted share. Gross profit margins decreased to 26.4% from 27.4% for the prior year period – the prior six-month period. Again this was primarily due to second quarter factors I spoke to. Operating expenses for the second quarter and six months of $3.9 million and $7.8 million respectively increased $270,000 and $310,000 over the prior year comparable periods primarily due to increased support costs for our value hearing health initiatives. Again we expect those projects to start ramping in the second half of the year. Turning to other financial metrics, our debt of $7 million was consistent with the second quarter – with the first quarter. We generated approximately $1.7 million in positive operating cash flow during the first half of 2015 and our cash cycle days at the end of the second quarter were 65, a slight increase from 57 days at the end of the comparable prior year period and consistent sequentially. On all this is a solid quarter for IntriCon and we continue to the deliver profitability while building the infrastructure required to secure high potential growth opportunities. I would now like to turn the call back over to the operator so that we can take any questions.

[Operator:]

[Operator Instructions] And we can take our first question from Dick Ryan with Dougherty. Please go ahead.

[Dick Ryan:]

Thank you. Scott what was Medtronic’s contribution, you said it was a record level I think, but can you break out the percentage.

[Scott Longval:]

They did about $7.1 million of the quarterly revenue.

[Dick Ryan:]

Okay. So you would probably almost have to go back to first quarter of 2014 to see that level, how do you think that shapes up in the second half?

[Scott Longval:]

As we talked about, we continue to see Medtronic grow. Mark spoke a little bit about some of the new accessory products that are coming online specifically the MiniMed Connect that is – we are not privy to exact launch date for those products. But as we view our business with Medtronic one that we will continue to grow, we may have some peaks in values quarter-over-quarter. But if you step back and look year-over-year we are highly confident that we can deliver double-digit revenue growth.

[Dick Ryan:]

Okay. And Mark you mentioned correspondence from the NHS, Europe is notorious for a lot of holidays through August and does that have any impact of when you might be able to hear a formal acceptance or where are you in that timeline?

[Mark Gorder:]

As we mentioned in there Dick we have got some pretty positive informal feedback. And we do have to wait. It’s a government entity, so the government entity has to go through channels to deliver any formal acceptance. We remain very positive. And if you look at this disruption that we are attempting to undertake here is overcoming the inertia of the status quo. And with the NHS, we have probably been working on this about 18 months. And we are the first new entrant in 20 years to the NHS contract. Other than the big six manufacturers, they have not had any new entrants in the last 20 years. So as we convince them that we are a great partner to get on the contract, it’s not just about today’s product, but it’s also convincing them of the technology roadmap that we have in process where we can provide technologies. We have the very best technologies to help them improve channel productivity and the method of delivery. And with somebody as large as the NHS that’s a critical feature. So I think they are very positive on having us in there because they think we can help them improve the delivery method in their channel. So we remain very positive, we will sit and wait for that formal agreement and I hope we are being conservatively when we say Q3 hopefully its sooner rather than later in the quarter.

[Dick Ryan:]

So what do you and PC Werth doing, I mean how do they get up to speed and ready to move this forward once you get formal approval?

[Mark Gorder:]

Well, we have had a number of initiatives working with them on putting the infrastructure in place. There is a lot that we have already got in place and what we are working on now is to get the feet on the street and the training programs in place, so that when we get that final letter that we can hit the street very quickly, we want to hit about 60 clinics in the UK as quickly as we can taking out preliminary product and training kits and software and getting into those clinics and introducing the product to them. So that’s all being put in place now in anticipation of receiving that letter.

[Dick Ryan:]

60 clinics, what would they have in total over there?

[Mark Gorder:]

I think there is about – I am not positive about this I would have to ask Delain. But it’s a lot more than 60. We are hitting 60 of the major clinics.

[Dick Ryan:]

Okay, go ahead, I am sorry.

[Mark Gorder:]

I will follow-up and I will verify that with you. We will put it in the transcript data, I will have to just verify that with Delain Wright.

[Dick Ryan:]

Okay, sure. And on your relationship with United, is that exclusive ended at the end of Q2, can you kind of give us the status update what their strategy is if it’s changing at all and how you view that distribution channel?

[Mark Gorder:]

Well, we don’t think their strategy is changing at all. Right now we have purchase orders in place that run through our estimate is roughly the end of 2016. So even in the absence of a contract we still have purchase orders in place. And we provide all the software – the fitting software and the service for their entire business model. So we anticipate nothing is really going to change. And we are in the process of working with them on introducing new technology that we have in the pipeline to add on to what we are already doing. So I don’t anticipate any real change in what’s going on.

[Dick Ryan:]

If you are seeing their POs for the next year and a half I mean is there any ramp that you are seeing in the demand that they are expecting?

[Mark Gorder:]

Yes. They are continuing to grow that business over when we started. And it’s kind of – but it’s a steady growth. Its not – there is no material increase quarter-over-quarter, but there is a continuous growth in unit volume.

[Dick Ryan:]

Okay, just one last one. Scott, do you have stock-based comp and depreciation for the quarter?

[Scott Longval:]

Yes. Stock based comp for the quarter was $145,000 and depreciation and amortization was 4.20.

[Dick Ryan:]

Great. Thank you, guys.

[Scott Longval:]

Thanks Dick.

[Operator:]

[Operator Instructions] And it appears we have no further questions at this time, so I will return the program to Chief Executive Officer, Mark Gorder for – pardon the interruption, there has been one more question come in, we can go to Ben Cohen with Cohen Partnership [ph]. Please go ahead.

[Unidentified Analyst:]

Just one question, I noticed that the inventory at the end of the quarter was substantially higher than in the prior quarters, can you give any explanation of what are we ramping up to?

[Scott Longval:]

As we prepare for some of these growth opportunities that Mark talked about in the value hearing health space and then also products related to Medtronic’s growth and release of new products that inventory is in preparation for those programs.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

And again it appears we have no further questions. So, I will return the floor to you Mr. Gorder for any additional or closing remarks.

[Mark Gorder:]

Thank you, sir. Once again we appreciate you taking time out of your day to join the call. In closing I would like to reiterate that while I am encouraged with the progress we made in the first half of the year, we still have progress to make. Financially, we intend to build on our momentum and anticipate sequential revenue growth in the third quarter and higher sales for the full year. Strategically, we remain focused on advancing our technology portfolio, building our value hearing health infrastructure and securing key channel partners. With clear evidence of an emerging value hearing health market opportunity and new partnerships coming onboard coupled with our strong Medtronic business, we are well positioned for future growth. We look forward to updating you on our progress next quarter. Thank you again for joining the call.

[Operator:]

And this does conclude today’s program. Thanks for your participation. You may now disconnect. Have a great day.