Q1 2020 Earnings Call
On the call today from Adidas is Jonathan Kennedy, you, just as President and Chief Executive Officer, Andrew Davies, Instead, executive Vice President and Chief Financial Officer.
Dr will begin today with the business overview of the first quarter 2020, Andrew will discuss the first quarter financial performance.
The only we will open the call for your question.
To ask a question. Please press the star button, followed by one on your Touchtone phone.
Today's call will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These statements include management's beliefs and expectations about our future results.
Our actual results may differ materially from these forward looking statements.
For a description of relevant risks and uncertainties pertaining to our business. Please see today's press release and our periodic an annual reports filed with the FCC.
Management's presentation of the financial results will be on a GAAP and non-GAAP basis.
Non-GAAP results exclude amortization expense restructurings and certain other charges and their related tax effects.
Management believes that the presentation of these non-GAAP measures along with our GAAP financial statements provide a more thorough analysis of our ongoing financial performance.
You can find a reconciliation of our financial results on a GAAP versus non-GAAP basis in today's earnings release.
I'd now like to turn the call over to Jonathan Kennedy, President and Chief Executive Officer, Natus Medical that's kind of.
Thank you operator.
Good afternoon, everyone and thank you for joining us today.
During today's call will provide you with some insight into how the pandemic it affecting our business and how we're responding to as many challenges after that well look at the results of the first quarter and discuss our visibility into future demand and how dependent are response factors into each of our end markets and geography. Unfortunately, we're not providing a financial outlook today. So we'll have.
To save any detailed discussion about future financial results for another time.
Healthcare providers and patients depend on our products and services everyday.
Our team members and partners are working tirelessly to maintain our supply chain and deliver our products and services and I sincerely. Thank all of them for their steadfast commitment.
The health and welfare of our employees customers and partners remain our top priority.
I've got a central supplier of health care products and services all of Nate. This is manufacturing engineering and customer support functions remain fully operational and we'll continue to support customers with vital supplies service and equipment.
We have transitioned to a company wide work from home model wherever possible and have utilize collaboration technology to continue our operations and we believe we'll be able to sustain this model for this perceivable future without a major disruption to our business.
We've made strategic investments in inventory to help mitigate potential supply chain disruptions.
And we've taken actions to reduce cost, including reducing travel and discretionary expenses.
However, we will continue to prioritize spending to allow continued investment in products and services that are key elements of our strategy for profitable growth in the years [laughter].
Drew will discuss in more details on how we're operating now now what areas we remain vigilant in identifying unknown risks.
[noise] today, we reported the results for the first quarter of 2020.
Revenue for the quarter was $109.4 million and non-GAAP earnings per share was four cents.
Overall, our revenue declined 2.8% versus the same quarter and the prior year after adjusting for divestitures.
Despite seeing significant impact from the cobot 19 pandemic during the first quarter, our neuro market continued to perform well.
Growing at 4.7% versus the same year same period last year.
Our newborn care and hearing a balanced markets declined during the quarter due to a worldwide softening of demand.
This brought our total revenues to $109.4 million well less than we originally expected we still maintained very strong operating cash flow of $17.4 million.
In addition to the cash flow generated from our business. We also drove an additional $60 million on our credit line as a proportion to ensure that we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty.
Now, let's look at some of the details around our end markets.
Our neuro market, which includes our industry, leading neurodiagnostic solutions as well as our neurosurgery a neural critical care products performed well during the first quarter would nearly 5% growth versus the same quarter last year.
Growth was driven primarily from double digit domestic E. G device sales, but offset by declines in all other categories and geographies as a pandemic response began to interrupt our normal business conditions.
Hi, David had the least effect on E G. As the long sales cycles for this equipment provider momentum going into the quarter.
However, we do expect EG equipment sales will fall off significantly during the next quarter as hospitals Reprioritize spending.
Revenue from neuro supplies and service was flat versus the prior year.
Oh, we're hearing a balanced products are composed of devices and supplies used by Audiologist.
Hospitals in piece to diagnose hearing disorders, assisting the bidding up training and tuning of hearing AIDS and for the diagnostic diagnosis of balance disorders.
This product groups includes are well known Otometrics Madsen, Oracle and biologic brands.
Europe is our largest market and this product category and was most impacted by the pandemic responses in Europe, which began early in the first quarter.
Revenue from our here in a balanced product family declined 13% from the same quarter last year due to the pandemic response.
Shipments of our innovative your scanner odor scan resumed during the quarter and we shipped a quarterly record of 95 systems as we work to fill the backlog of orders.
We continue to be enthusiastic about OTA skin as it brings the benefit of digital scanning technology and practice workflow improvements to our customers.
It is a newborn care product family is used by hospitals worldwide.
Deeper divestures and discontinued products during the first quarter versus the same quarter of last year.
And lastly, I'm happy to report that we resolved all of our significant product shiploads by the end of the first quarter in all three product categories.
Before I turned the color to drew I went to again, thank all of our employees customers and partners for their willingness and ability to quickly change how we work in order to meet our obligations and the ultimate needs of our patients.
Everyone's health and safety is Paramount to our mission and of course to the wellbeing of a families and teams that we work alongside with every day.
Our hearts and thoughts are with those who are suffering their family members in the front line caregivers that are sacrificing so much in order to eventually restore health and normalcy to all of us.
Now I turn the color to drew Davies, our executive Vice President and Chief Financial Officer for a deeper dive into our financial results and the changes driven by the pandemic response true.
I think you Jonathan.
Jonathan stated, we reported first quarter 2020 revenue of $109.4 million at 4.7% decrease from the same period last year. The revenue decline was driven primarily by divestitures and other end of sell products previously announced and the impact of Coven 19, partly.
Set by strength in domestic E.G. device sales.
Revenue from our neuro and market was $65.3 million or 60% of total revenue during the first quarter compared to $62.4 million or 54% of total revenue during the same quarter last year.
The 4.7% increase in neural revenue is attributed to attributable to growth in E.G.
[noise] revenue from our newborn care and market decrease 9.8% to $24.2 million or 22% of total revenue during the first quarter of 2020 compared to $29.5 million or 26% of total revenue during the same quarter last year.
The decline was primarily attributable to the divesture of medics and and the sale of neuro come balanced products revenue from our hearing imbalance in market was $19.8 million or 18% of total revenue during the first quarter of 2020 compared to $22.8 million or.
Per cent of total revenue during the same quarter last year, the hearing and balance revenue was lower than the previous year, primarily due to the slowdown in demand related to the coven 19 pandemic the virus spread significantly.
During the latter part of the quarter in Europe, which where the majority of hearing inbound sales occur.
In total revenue from devices and systems contributed approximately 73% of total revenue in the first quarter of 2020 compared to 71% in the 2019 period revenue from supplies and services was 27% of total revenue in the first.
Quarter compared to 29%.
In the 2019 period.
Revenue from domestic sales was approximately 62% of total revenue in 38% from international in the first quarter of 2020 compared to 50 per cent and 42% international in the same period last year.
Non got basis or gross margin decrease by 35 basis points in the first quarter of 20, 20% to 59.2% compared to 59.5% and the first quarter of 2019.
Decrease was driven by.
Revenue deferrals higher freight costs related to coven, 19, and lower than expected manufacturing overhead absorption as a result of the lower revenues.
Gab gross margin decrease 55 basis points to 57.4% and the first quarter compared to 57.9 per cent in the same quarter last year.
First quarter non gap operating expenses decreased by $600000 compared to the same quarter last year. The decrease in operating expense was driven primarily by cost reduction initiatives, including the impact of removing the operating expenses from to vested businesses offset by an increase in our in D.
Expenses, Hi, R. and D. included spending on remediation an M.D.R. the medical device regulation for Europe.
Only three of the 15, Seattle product Remediations will remain after this quarter in are expected to be complete and Q3 this year.
Are non gap.
Operating margin decrease to 2.9% compared to 5.2% in the same quarter last year on lower revenues and gross margin and slightly lower operating expenses.
On gap other expense was $800000 for the first quarter driven by exchange rate fluctuations.
Interest expense was $700000 during the quarter, we expect to interest expense during the second quarter of 2020 to be approximately 900 $900000 and for the full year to be approximately $3 million or first quarter nine gap effective tax rate was 24% and we anticipate.
Overall, 2029 gap tax rate to be between 22 and 24%.
And I got basis first quarter, 2020, net loss with $3.6 million or 11 cents per share compared to a net loss of $30.4 million the same quarter last year.
Nongaap net income decreased $1.4 million compared to the same quarter last year non gap earnings were four cents per diluted share.
In the first quarter were recorded $6.9 million of depreciation and amortization expense Sharebased compensation was $2.3 million during the first quarter.
Now, let's look at some of the highlights from the balance sheet and the statement if cash flow.
Are outstanding debt increased by net $45 million in the first quarter as we repaid $15 million early in the corridor.
Drew $60 million on our line of credit in a quarter as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during the extended.
Period of uncertainty.
We ended the core with $170 million in cash and at this time expect to remain cash flow positive for the year.
Cash flow from operations $17.4 million during the quarter.
Our day sales outstanding decreased three days versus the same period. The prior year to 75 days driven by increase collections, we repurchase 465000 shares or 1.4% of shares outstanding and an average price of 22 point $22.
Some 56 cents during the quarter or current share buyback program has $40 million remaining.
We plan to put further buybacks on hold until uncertainty around coven 19, clears nongaap diluted shares outstanding increase to 33.8 million shares compared to 33.7 million shares in the same period last year.
Looking ahead to Q. too, we expect revenues to be down significantly from our previous guidance and relative to the same quarter last year due to the uncertainty of demand in the coming quarter in the full year, we will not be providing revenue in earnings Guynes at this time.
However, I want to provide a little more detail on how we view our demand the impacts we see two on our supply chain and what we've done to reduce spending and usage of cash.
We analyze our demand we look at it in a few different ways. One way is device sales versus service and supplies device sales. Typically makeup roughly 70 per cent of our revenues was servicing supplies constituting 30 per cent.
This environment, we expect revenue from service and supplies to be less impacted.
Then the revenues from devices.
Another way, we look at demand is by the last two city.
Of one impatient needs to receive care.
<unk> related to one of our three and markets based on what we know today, we expect demand for a newborn care and market to be the least impacted because care is determined by the birth of babies.
<unk>, we expect demand to be mixed with areas like neurosurgery and neuro critical care as well as portions of acute E.G.T.B. relatively any last stick while demand for E.M.G.M.P.S.G. would be more negatively impacted.
The third of our three and markets hearing imbalance is expected to be the most elastic and therefore, the most negatively.
Impacted by the Coven 19 environment as the patients our customers are belong to an older demographic and will be less likely to visit an audiologist until after fear of contracting the virus has subsided.
Geographically, we expect Europe in the Middle East to show the most weakness with North America down to a lesser degree.
Asia Pacific <unk>, and and Asia Pacific beginning to rebound from the low in the first quarter.
On the supply side, we've made strategic investments in inventory to help mitigate potential supply chain disruptions.
This time or supply chain appears to be relatively stable are known risk for the second quarter or not significantly more than what we have seen in recent quarters and should not have a meaningful impact on revenue.
We are monitoring our supply chain around the clock to surface any new risks.
The issues. We are monitoring includes supplier capacity issues freight traffic limitations suppliers prioritizing covert 19 supplies over our orders and lead time challenges for raw materials, our suppliers use to make their products.
In light of the reduction in demand we've had several actions to reduce our spending in Q2 and beyond reductions include minimal travel cancel trade shows constraints on overall payroll increases required time off and reductions in outside services.
Incentives the analyze benefits of these actions is roughly $10 million.
We expect to resume providing quarterly an annual guidance when revenue visibility returns to normal in the coming corridors.
And with that I will now open the call for questions.
That's our mind or ladies and gentlemen, if you'd like to ask the question at this time at his star and one.
We have a question on the line up Jason Bedford.
Yeah mine is helping.
Oh, Hi, good afternoon can you hear me Okay Guy.
Yeah, we do thanks, Jason.
Okay I hope everyone is healthy so a few questions.
Crochet a.
Additional disclosure here and I I may jump around but when you look at your capital business the device business.
Is there any way you can kind of break that out by segment is one segment more reliant on capitol than another.
Yeah, Jason's jotted definitely B.E.D. device business is capital intensive.
And our largest product category, you know sub brought a category.
The new or care area, you know, we sell the Retcam vision Screenvision imaging devices that capital intensive.
More so than anything else and newborn care and then in hearing imbalance, it's much more if capital too, but too much smaller degree but in that area. The the the you know the environment more retail like in that there's that you know <unk> thousands of small audiology shops to buy our equipment.
Individual own shops, some corporate on shops, but they're much more sensitive to you know it get equipment that may cost thousands of dollars more so than say a hospital wasn't in that case, so kind of that the the big pieces by you can market that would look like capital.
Okay, So, which which segment has the most exposure to Capitol sorry, if I missed it.
Neuro.
And there.
Yeah, It's obviously have a pretty diversified portfolio can you walk us through.
The typical ticket size just as we think about hospitals reprioritizing spend just so we can put it in context around the typical order from a dollar standpoint, just so we understand kind of what's what's small or big orders et cetera.
Sure. So we'll talk about tickets size in the capital up the capital category in Neuro you know, it's it's 25002 into the millions depending on this does how many bads a hospital might be doing but it's you know, it's computer type equipment and they call it tens of thousands of dollars per per.
Program or per station and then newborn care I could say, we have retcam and that's 100000 dollar device. That's the only device in that area. That's expensive, we do sell our Nick view cameras, which I would say would be highly discretionary and highly capital like in a hospital and those are you know 10 15 20.
And dollars an installation maybe more if you're doing more cameras and then in the audiology area and hearing that balance we have devices that are in several thousand dollar range for an S.P. up to you know in the low tens and 20000 dollar range.
Okay. So definitely on the size wise <unk>, you know millions of dollars potentially hundreds of thousand dollars average.
Newborn care tens of thousands and then audiology thousands and you know maybe tens of thousands part of your money as P.
Okay, that's helpful and.
I thought first quarter actually came in a bit stronger then.
I think we were kind of expecting given the the covert dynamic have you seen but it sounds like.
To choose when you're going to feel it much like other companies in the in the group have you seen orders been cancelled or these more pushed out.
We haven't seen cancellations, we've seen some hospitals you know slow down orders, we've seen them you know actively push some waters out although I would say, it's it's broad, but we have seen that here and there are expectation is that that is still more to come very likely.
Hospitals figure out the spending situation and reprioritize, they're spending we think that for we hear from hospitals. You know the response, a pandemic is going to be ongoing even even when you know open up order start to come in hospitals will still need to be vigilant for recurrences, a pandemic and of course they've just.
Which dover.
Two a covert I see you model that most hospitals switching back and having their staffs and they're professionals be able to jump back into the normal life will take some time and so we expect that to continue into the second quarter.
Our hope is the second quarter becomes the the bottom of the curve, but we won't know for sure until we get there obviously.
And then just geographically kind of give us some direction there.
You break up the per cent of sales.
Least versus North America versus Asiapac and then also on that can you just talk about the what you're seeing in China today versus what you saw in the first quarter.
Yeah, I I I don't have a details exactly for the you know geography that you laid out we'll get we can get to that yeah that that's out shopping I Q.
Of what we're seeing so you know China, obviously was the first market for us to see.
The impacts of Kobe, and we saw Lockdowns and it's just shelter in place orders that really slowed commercial activity in China very early in the first quarter and so that's where we felt that most in the first quarter later, but not much later in the beginning of the quarter, we felt that in Europe, and as Europe jumped on board and.
The shelter place and have locked down and then it was very late in the fourth quarter that we saw in the United States and as I commented on my prepared remarks, the momentum on around the capital sale any g. was there and so lots of those deals we had big deals going on in the quarter that closed and shipped as normal, albeit a.
You know probably as as Windows started closing you know towards the end of the quarter.
Hey, Jason It's drew I I can give you a little more detail on the breakouts. So.
All kind of use Q1 of 19 actually as as as a proxy I think you know for the most parties stage some or all the during this time as we said North America has been a little bit stronger but.
Last year in North America was was roughly 67%.
Of Ah revenue in the corridor, maybe maybe a little bit more or roughly that amount, 25% and me and 17% in a pack and then my Tim making up the balance.
Okay. That's helpful. Northerners continued to be the strongest and most profitable area of the World War, that's the United States in Canada.
Right Okay.
How much is left you mentioned shipping 95 systems.
<unk>, how much is left on that backlog.
There's a few units left we were we weren't able to quite ship all of it but it's in the I you know I think we've got roughly yeah less than 50 to go on the on that backlog that had built up.
Okay. Okay, and then maybe last one for me just on the gross margin line. It came in a little lower than we expected which weighed on.
Margins.
Away to parse out or how should we think about the the gross margin line given name volatility in the top line is there a fixed versus.
That that you can help us with or any inside or help on that.
<unk>.
Yeah. There's there was you know, we we were caught a little bit.
At the end of the quarter was the you know having that.
Going into the quarter, we we felt pretty good about it we didn't really see the drop off Intel kind of the second or third week of March and then then it started to come down. So we didn't we didn't really have time to react to to kind of reducing some of the the variable expensive we could.
And some of our overhead and and getting that under control some staffing and things like that so we we were impacted by that we also had some revenue deferrals in the quarter, where we had some systems that shipped and we differed part of.
Revenue for that because we didn't have the complete complete items for for the system. The system was functional but there were some additional things that helped make the margin better. We've also seen during this time that there's been a cut back in the amount of <unk> capable.
He just around the world is so freight costs have actually gone up we've had to do a lot more by air they're spend less less marine traffic less fewer options in total and so the cost is gone up there, but we're we're working to to to remedy all those it's still.
We do have some manufacturing facilities in the company that that represent fixed costs and you know was so we will lower revenue levels here for a while be impacted on the gross margin line, but we're working too.
To cut some of the things that are that are variable the that we can and improve those I mean, it's helpful to to realize that we make a big part of our quarter normally in the last couple you know three or four weeks of the quarter. So when.
That's when we absorb a lot of the overhead if that doesn't happen as with the caissons before we lose out on that absorption and the you know the productivity gains that you typically have in the last three or four weeks in the corner.
Okay. That's helpful and maybe just one last one.
I I just want to make sure I heard it correctly.
[noise], you've reduced you've taken about 10 million of annual cost savings out of the business is that correct.
Yeah, that's what they wouldn't be annualized so let's say if if things started to come back in Q3 or Q. for you know we would started traveling again there would be you know we're we're servicing customers are we're still traveling to service customers, but the sales team is is.
Doing a lot more their interaction with customers remotely and based on the relationships they have.
But if we get into if if revenue starts to improve again and Q3 and Q. for will start traveling again, maybe some of the trade shows come off and we can we can go back to kind of the kind of the spending that we had so <unk>. What we've done if you analyze that would be 10 million for the year, but we.
<unk>, that's not necessarily the savings will get for this year because if it comes back we'll start spending again and and if it goes down we yeah. If it goes down when it was certainly do more than I would pointed out to Jason for your out your models into 21, I would imagine you know starting got to be the year that poster looking at at this point or at soon here.
The the 10 million drew mentioned is a temporary we haven't made as permanently. So when you say take it out of business as as temporary these are the exercises that we do it some letters that we have to deal with you know a dip in demand and that sort of thing, but it from an ongoing perspective, we would need to do more if we felt that this was permanent and we needed to restructure are are.
Cost you know set up at the company.
Alright, that's a hopeful and I apologize for any background noise.
Yeah, I didn't hear it no it's good.
That concludes today's question and answer session I'd like to trying to call back Tomatoes for closing remarks.
Okay.
Thank you operator.
And thank you everybody for joining today, we're doing our best to keep the people that make neatest work.
Safe unproductive, we have a dynamic and dedicated global organization driven by the needs of our patience and our business is fully operational and most importantly, we have a commitment and the financial strength to support our customers and succeed during this historic environment. Thank you for joining us on today's call and please have a good debt.
Ladies and gentlemen, just concludes today's conference call. Thank you for participating you may not just connect.
Yeah.
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