Q2 2020 IntriCon Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the injury corn Corp's second quarter 2020, I names like conference call. At this time all participants are in the leasing El Nino asking me speakers presentation. There will be a question and I was just fashion to ask that question. During this session you will need to.
Press Star one on your telephone.
Please be advised that to these conferences recording.
If you like weren't any burgers Houston, we stress cars, there, though I would like to have the conference over to your host Disney Investor Relations. These really Silva thinking go ahead.
Thank you Nica before we begin I'd like to purpose I remarks, with the customary safe Harbor statement.
Today's conference call contains certain forward looking statements statements are based on the current estimates and assumptions Intricons management and are subject to uncertainties 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 less.
And description of the risks and uncertainties associated with our business. Please refer to the risk factor section of our most recent annual and quarterly reports on form 10-K and form 10-Q.
Actively with the FCC.
With that I would now like to introduce Entercom CEO Mark Gorder for a view of the company second quarter performance got long both the company COO and CFO will then cover the financial results in more detail at that point, we'll open the call for your question.
Mark regularly.
Thank you really good afternoon. Thank you for joining US we hope you are all remaining safe and healthy.
I would like to start or coal by recognizing the intercon paid.
Over the past few months I've observed our organization coming together to be challenges demonstrate incredible resilience and operate at the highest level all while adapting to a new working environment.
I would also like to congratulate just got long go on his appointment as Intricons next CEO more than a year ago is I began to contemplate my transition is apparent that Scott deep knowledge of our operations or financial structure as well as true leadership qualities made the obvious choice to fill the CEO role with the.
Full support of the board, we made the decision to move forward consonants in his shared vision and commitment to driving our next phase of growth into enhancing shareholder value.
We began taking the steps necessary to ensure smooth transition of last year as a result throughout the past here. Scott has played an instrumental role and delivering the successful outcome about numerous critical milestones.
And I'm confident that will enable us to strategically evolve our business and best address key medical growth markets.
After October one I look forward to working with Scott in an advisory capacity throughout the remainder of the year.
In the meantime, we've actively commenced our CFO search.
Well, we hope to have somewhat in place by the ended the quarter. The priority is identifying the right candidate to lead our finance team and grow with the company.
And then meantime, we have a very strong financial organization currently under Scott the mechanisms in place to ensure we have ample support through the transition.
Now I'd like to cover some of the highlights of our second quarter performance. I'll, then turn the call over to Scott for some additional thoughts on our business in the current quarter and going forward.
As well as more in depth review of our financial results. We'll then open up the call for your question.
You interpret could team continued to deliver against the priorities. We established at the outset of this year not all of our accomplishments in the second quarter.
Total revenues were 23.6 billion, representing a 20% decline over the prior year exceeded our initial expectations at the time of our Q1's, earning call in early May.
The visibility afforded to us by ordering patterns earlier in the year from our largest medical customers.
We were able to enter the second quarter with some degree of strength that carried through April and may despite the shutdowns impacting the macro environment.
As we highlighted last quarter, we quickly implemented several measures the best assure the health of our employees and their families.
While maintaining operation critical processes to support our customers their patients in our ongoing business.
This enabled us to effectively plan for the remainder of the core and continue to operate at their capacity without interruption to our customers and our partners.
In addition, our hearing health segments performed better than expected due in part to renewed access to Audiologist and solid orders from our indirect and consumer customers.
As a result, we exited the quarter with cautious optimism as we enter the second half of the year.
Importantly, the significant restructuring actions taken over the first half a year coupled with adjustments made during the pandemic contributed to meaningful bottom line improvement and provided overall stability to our core business.
I'd like to take the next few minutes to comment on progress at each of our core high growth medical markets, including diabetes surgical navigation hearing health and drug delivery.
Starting with our diabetes market sales to our largest customer represented 57% of total revenue in the second quarter.
Well, we did experience the anticipated year over year decline in Medtronics business actual results in the quarter were better than originally anticipated driven largely by two factors.
First we saw continued strength from disposable sensors due to greater compliance from those diabetics using insulin pump systems second CGM transmitter orders were stronger than anticipated due to growing interest in standalone TG habits, and enable hospitals to provide remote monitoring and keep diabetes.
Patients safely at home.
Our relationship with Medtronics diabetes group remains as strong as ever.
And as we look towards the second half of the year are confident that we're well prepared to continue to meet volumes advance and support their anticipated global product launches and upgrades.
Next turning to the surgical navigation market. This is the segment, we're especially excited about as we see tremendous growth opportunity.
Both opportunities to leverage our existing capabilities and micro miniature electronics precision molding and medical coil technologies.
As well as the new market opportunity opening up following our recent acquisition of Emerald medical services or.
Yes.
Our medical coil business continued to deliver strong results during the second quarter up over 35% over the prior year driven from customer demand, serving the interventional pulled analogy and electrophysiology markets.
As we noted on our last call.
M.S. as a successful history delivering complex interventional catheters addressing a range of applications in the cardiology peripheral vascular neurology radiology and Pulmonology markets.
In addition to driving growth in their existing catheter business, we believe dms could enhance the content, we provide an interventional pulmonology for lung biopsy in at electrophysiology for heart mapping and precise Appalachian.
The integration of SMS is going well, if not exceeding our original expectations and Caribbean contributed 1.1 billion to our revenues in the quarter.
We continue to anticipate this business will grow in the low double digits throughout the remainder of 2020.
And to be accretive good net income for the year.
Over the next few months, we will be focused on accelerating business development activities, while completing the initial phase of integration.
Including renovation of space consolidation of administrative functions in streamlining of critical processes.
Next I'd like to discuss our hearing health business.
During the quarter, we continued to make good progress further focusing our resources, including our remaining hearing help express operations towards opportunities within an indirect and consumer channel targeting high profile partners that value our ability to deliver an ecosystem of care platform.
Which includes superior hearing AIDS self funding software and customer care to the U.S. market.
As anticipated. These actions in addition to providing a greater focus on more synergistic high growth opportunities.
Also substantially reduce associated losses.
Despite the widespread disruption, resulting from the coal with 19 pandemic, we continue to engage in discussions with several commercial entities that are actively pursuing end customer healthcare initiatives.
That's specifically solutions for the hearing health market, including retailers branding partners and pharmacies.
However shifts in legislative attention at FDA priorities, resulting from the virus make the timing of an update on draft guidance at the LTC irrigate regulation on certain.
We remain confident however that given the high cost of hearing AIDS today and consumer enthusiasm for change there remains tremendous potential ahead of the market.
Earlier this year, we elected to postpone ourselves fitting software clinical trial until such time as we can assure the health and safety trial participants.
We have been working on safety measures and anticipate initially initiating the clinical trial by the end of this year with a goal of completing the trial by mid 2021.
Lastly, our needle assembly business, which today serves the drug delivery market remained relatively flat with prior quarters.
We remain steadfast in our commitment to be a leading joint development manufacturing partner for miniature medical devices, including microcredit your products microelectronics.
Micro mechanical assemblies, and complete assemblies that enable affordable and accessible health care and improve the quality of life for those we serve.
I am encouraged by the progress we've already made on the priorities we established for the year. Despite unprecedented changes to the global healthcare landscape and the week of Cold and 19.
And those four priorities remain unchanged one.
Leading the volume demands of Medtronics diabetes business.
To accelerating the diversification of our non diabetes revenue by leveraging our core technology platforms.
Three continuing to pursue and secure partnerships can utilize our hearing aid technology, so fitting software and customer care expertise.
And lastly, implementing an organizational structure the best aligns with our focus on driving a sustainable pipeline of growth opportunities.
At this point I'd like to turn the call over to Scott to cover some of the trends we see emerging in the second half of the year and importantly has longer term views on the evolution of the business Scott. Thank you Mark.
I am honored by the boards confidence and appointed me as Mark successor, and excited about the opportunity to leave our company forward.
There's been a pleasure to work alongside this dedicated team they've been part of the strategy and implementation of a recent transitions in our business.
Im confident these measures will not only enable us to continue to achieve success in the priorities. We've established for the rest of the year.
But will enable us to drive operational changes that will best enable intercon to focus on our core competencies in more synergistic high growth medical markets, where we can have a meaningful impact.
And as a result, the greatest growth.
As we enter into Q3, we're seeing strengthening trends broadly across our medical business.
While the macro healthcare environment remains fluid I.
I believe intra kindness, whether the worst for the storm with several encouraging milestones on the horizon, including strengthening order patterns across our medical business.
Particularly with our largest customer in the diabetes segment and our medical coil business.
Furthermore, Bismarck previously noted we've adjusted our cost structure to provide greater business stability in today's uncertain business environment.
Importantly, as part of this restructuring we've begun to establish structure that will enable us to better focus our resources on strategic market opportunities that are key to long term growth.
Turning to our financials for the 2022nd quarter, We reported net revenue of 23.6 million. This was 29.3 million in the comparable prior year period.
The decrease was primarily due to the cobot 19 impact on our diabetes business in the legacy hearing health channels in the absence of revenue from high health innovations.
By core business segment revenues in our medical business for the quarter or 18.1 million.
A 13% decrease year over year and represented 77% of total revenue.
Which was relatively consistent with the prior year quarter.
Again this decline was largely due to the cobot 19 impact on diabetes offset by a 21% increase and other medical and a 1 million dollar revenue contribution from commercial medical services, which the company acquired in May 2020.
And our hearing health business segment total revenue in the second quarter was 4.5 million down 33% over the prior year second quarter.
Once again this decrease was largely due to no revenue from health innovations in the coated 19 impact on the legacy hearing health channel.
However, as Mark noted earlier, we did see some upside in the segment due to impart a renewed access to audiologist and solid orders from our indirect and consumer customers.
More specifically within the hearing health segment indirect and consumer revenue was 1.4 million.
Direct end consumer revenue through our hearing help express business was also 1.4 million and legacy OEM revenue was 1.7.
As previously announced in April we took several steps to strengthen our balance sheet to reduce our cost structure.
Including reduction in headcount and a temporary salary reductions for directors and management.
The salary reductions lowered expenses for the second quarter by more than 750000.
And we're fully restored at the beginning of the third quarter.
The company also incurred several onetime charges totaling 2.5 million that impacted operating expenses.
This included restructuring charges of 1.2 million.
Dms acquisition expenses of 493000.
And CEO retirement costs of 823000.
Partially offset by coded 19 repayments from the Singapore government of 349000.
In the press release, we've included a reconciliation of non-GAAP measures table and footnotes summarizing those items.
Second quarter gross margins were 28% relatively flat year over year.
Primarily due to the cost reduction initiatives and favorable mix offset by lower volumes.
Operating expenses for the second quarter were 9.2 million compared to 11.6 million in the prior year period.
As previously mentioned, we incurred several onetime charges during the quarter totaling 2.5 million.
During the prior year comparable period, we incurred a $3.8 million impairment church.
We posted a net loss attributable to stakeholders of 2.5 million or 26 cents per diluted share versus a net loss attributed to shareholders, a $5 million or 50 cents.
Per diluted share for the 2019 second quarter.
As presented in a reconciliation of non-GAAP measures table in the press release the company posted a jet adjusted net loss of 143000 or two cents per diluted share in the second quarter 2020.
Versus a net loss of 1.3 million.
Or 14 cents per diluted share for the 2019 second quarter.
Lastly, our cash balance at the ended the quarter was approximately 28 million.
Which brings us to guidance, we continue to find that the co. Good 19 outbreak unrelated uncertainties create a broadly variable business environment for us and as a result, we remain unable to provide meaningful guidance range for 20 Twond.
That said as we enter into the second half of the year. It appears our business trends are stabilizing.
Furthermore, we believe our accelerated restructuring efforts not only drastically reduced our cost structure without impeding our ability to meet customer demands, but also better positions intercon to pursue market opportunities that will enable us to best leverage our core competencies as we pursue targeted.
Hi growth medical markets.
Now I'd like to turn the call the back over to the operator, so mark and I can take questions.
As a reminder, asked a question.
Firewall telephone.
A question first about the hash key.
Your first question comes from the line of Jon Block from Stifel. Your line is now.
Hey, Scott Hey, Mark how are you.
Hi, John how do you know John Thanks.
Let me start going are you sort of closed.
Commentary, so I'll pick up the I just wanted you to discuss.
Because ability to do additional deals and you mentioned dms seems to be going well.
Integration, a little bit ahead of plan, but I wouldn't be environment could lend itself to additional opportunities the environment, obviously highly fragmented.
You guys have the balance sheet. So can you just talk about how we should think about some of those moving parts you have your hands full with CMS came from an organizational standpoint, you can still pursue other deals over the next six to 12 month.
Yes, great question, Thanks, Sean and Thats.
It's very important part of our growth strategy, obviously, we've laid out.
We think is a highly achievable organic growth strategies, but that needs to be augmented with M&A activity.
BMS is a great example of one that we could do and do so with little disruption.
As we mentioned on the call.
In the past, we believe that our Singapore management team can.
Easily integrate that business with no disruption at the corporate level.
So with that we have begun to.
Enhance and accelerate our corporate development efforts to begin to look.
Potential other acquisitions and build a pipeline and our goal would be to look to Sina physician to do something.
Sometime during 2021, so we feel based on where we're sitting with with Emerald based on our balance sheet.
And greater knowledge into the markets that we want to pursue.
It will be an ability to get something accomplished in 2021 got it very helpful. Mark I'm going to shift over to.
Hearing side, you mentioned the trial.
Like we approved in mid 21, and maybe that's in line with when the regs are put out there who knows but the government certainly as their hands full with a lot going on to be fair, but I'm just curious if anything more.
Of the rigs per se.
On the structure of it in terms of how they made a fine mild or mild to moderate is there any more color that you're hearing coming out of Washington, and when the regs are eventually put out there.
How they might be constructed in that regard that I just got one more quick question.
Well, we we I participated in a.
A hearing industries Association meetings recently middle of July.
Nothing new forthcoming.
Relative to the FDA other than they were totally awash with over 19 activities said thats.
It was most likely that hearing health is considered a low priority.
Having said that the the industry.
It was curious there there assuming that.
Yes.
Best case, the regulation would come out would be have mid next year.
And thats that would be the the normal statutory requirements, but it's most likely going to be delayed from that.
And Thats all we know we followed up with all our sources continually we haven't heard anything new on the regulation itself other than when the FDA approved the Bose.
Submission for the Doble application for their self sitting technology that.
In that.
Denovo.
Response by the FDA. It was clear they had made a lot of decisions relative to the specifications and I would highly doubt that they will shift.
Inefficiently away from what was.
Authorized there.
So the idea that mild to moderate I think.
If one skilled at the art looked at the specifications for.
The boas device, they could figure out what kind of power levels and so forth would be most likely forthcoming when guidance issued.
Got it.
And that would play to your advantage in terms of its still opening up the mild to moderate and having the moderate tag to it which would still open up a large chunk of the market to you and others correct correct and it's clear the industry will try to narrow the definition of moderates and the and those for greater consumer access will fight for.
More liberal definition of moderate understood.
One last one for me Scott.
While you still have your CFO head on.
A lot of positive surprises one means that gross margin.
Essentially in line with a year ago, yet the topline was still five to 6 million below the levels. We saw in Twoq 19 in the past the gross margin was very tightly correlated to your topline era.
Capture despite the topline its five or 6 million below I think you alluded to mix, but maybe can you talk about some other things that's ago favorably for the gross margin line and maybe more importantly, what we think about the model going forward.
The new base. This yes line and with a 20 Percentish GM. Thanks, guys.
Yes. Thanks sensors for the question gross margin has had a couple of things that were impacted during the quarter will positively one we mentioned the temporary salary reductions that we instituted for the second quarter that has about 175 basis points impact on the margin as I mentioned, we added those facts into.
Play in the third quarter, so we won't get the benefit of that as we move into the back half a year and from mix perspective roughly.
About 200 basis points.
Positive impact from from a favorable mix so.
We don't expect the mix to be that favorable again as we move into the back half of the year.
But we have done a lot in terms of reducing our cost structure. So that base that we entered into the year with.
In terms of our cost of sales is now lower.
Got it perfect. Thanks, guys.
Thank you. Thank you John.
Your next question comes from the line of Kyle Baozun from Collyer security.
Please now open.
Hi, good evening, Thanks, Charlie updates here.
Just a couple of questions here. So we obviously saw a massive outside investment into Medtronics diabetes business to drive its pipeline.
Core several key management changes in that business as well.
How has anything changed if at all from Intricons perspective, it seems like there should be a lot of upside to this partnership given all the attention.
Diabetes is getting right now within Medtronic.
Yes. Good question. Thanks knows the big announcement coming out of a the was the $331 million.
Deal that Medtronic, coupled with Blackstone.
To fund research and development initiatives for the future development of.
The diabetes group signaled a couple of things to me one the commitment to medtronic to that diabetes market. They obviously envision that market in that business to be a much bigger pieces of the overall Medtronic hi, so that commitment there I think speaks volumes without agreement in place and for.
For us is very exciting it gives us opportunity to work with Medtronic, where they can be more forward thinking spend more money and research and development.
As a joint development manufactured somebody who is we've set.
Our design engineers to sets out there today design engineers to provide them solutions for the diabetes market. It just provides more opportunity. So I think it's.
Something that is obviously going to be great for Medtronic, and we believe that likewise it can be a grades.
Agreement and affect us in a very positive way.
That being said if you look at those investments and what their earmarked for.
They are for future platforms and these are platforms that can be out three to five years. So we're not going to get immediate benefit out of it but.
Again.
Can put us in a position to sustain the long type a long term growth that we anticipate coming out of the diabetes market.
Got it agreed I appreciate that.
And sort of following up on a previous question I mean, intercon from a valuation perspective right now is easily one of the most economical names out there I mean, obviously medtronics business isn't and transition stayed in the hearing aid opportunity has been in holding pattern here.
Obviously very nice acquisition Dms.
As a nice addition.
I'm, just curious how you've been thinking about ramping shareholder value here.
In the midst Cove, Ed, perhaps spending cash to buy back shares might not.
Ill be an option despite the cheap price, but what what other options are you considering to kind of get to stack moving in the right direction here.
Now that's a great question.
Clearly has been frustrated and see our stock.
Being depressed is the way that it has been you look around the markets and you see other businesses out there getting.
Significant.
Patients.
Much higher clip than US you see one just over the last couple of weeks in the hearing health space with your go raising a significant amount of money.
You look across some of the more medical pure plays and you'll see multiples are significantly higher than us, but theres no silver bullet.
And as much as I like the idea of buying our stock back cheap.
That's that's not going to solve our problem, we have to grow out of our problem and we've laid out a strategic plan that we think we'll be additive both organically and inorganically and our focus is to execute and if we do that over the coming quarters.
In Vienna position, where we can go out and tell the story and build back some credibility I think the stock will will definitely.
Take care of itself. So I don't see us doing any any short term activities to prop up the stock.
Other than better execution going forward.
Okay got it and then one more if I may and on the self fitting safra trial.
Set to potentially.
Enroll later this year.
Approval mid next year, but.
Can you remind me did that enroll at all.
Began the year and when you begin to enroll again, where is that going to be taking place how many sites is it.
Where it'll we're anticipating one site and we're currently exploring a partnership with a very experienced improved and.
University laboratory that would assist us in conducting the trial.
And we have we did not enroll anyone we have not gotten to the point, where we're going to starting to roll that when coal that hit we just completely shut that down because we couldn't guaranteed the safety of any elderly patients coming in so we anticipate that in the towards the end of the year, we would start to trial, we're hoping to complete.
Created by mid next year.
Got it okay. That's helpful. Thanks for taking the questions.
Your next question comes from the line is Andrew Dsilva from B. Riley FBR. Your line is now.
Hi, Thank you very much for taking my questions I hope everybody is doing well.
My first question just relates to Medtronics recent.
You know cross patent agreement with the tandem I'm just curious how you see.
That benefiting are impacting.
The business as it relates to the CGM space and your partnership with Medtronic.
Yes, Andy to the best to my knowledge in my understanding that agreement was struck where I think there was some back and forth where both thought maybe they were infringing on each other's technology is it related to the pump.
So this was a clean settlement of that going forward.
So longer term I don't really see that having much impact in terms of our business with Medtronic.
Okay, great and just to stick with Medtronic really quickly as far as.
Mass is.
Revenue for that came out of Medtronic, what do you know what that just a total customer concentration was.
With Medtronic, including CGM NMS.
Yes, so for Medtronic for the quarter roughly a third diabetes was 13.5 million.
In about a 750000 out of.
Yes, yes into the cardio group.
Okay perfect and.
As it relates to hearing help express and you changing the initiatives as you move some.
That being a sales and marketing engine into it development and testing engine for you can you can you. Just described that transition now are you still using are you still using them as sales and marketing arm and and if not what have you learned so far.
Utilizing them as up our product development and testing engines for the company.
Well one thing we learned.
Over the past 12 to 18 months as we tried to started to explore working with branding partners and retailers.
Was the value they placed on.
Tell audiology customer care service.
And it was clear that if we were going to go in that direction that outbound telemarketing.
It's not going to be a good path for us to pursue.
The restructuring predominantly.
Focused on putting hearing help express in a position where the required assets were still in place while significantly reducing reducing the cost of operations. So we feel at this point, we're very good shape with intercon being the developer of hardware fitting software.
And HHG, providing customer care and service.
And wrapping that into a complete offering for branding partners and retailers. So we think that at this point.
Weve.
Restructured the business into a very good position.
Okay and my last question just has to deal with CGM sales.
So it's it's been.
A little bit more than two years since the 670 I was rolled out.
And you start to scale reasonably hatched once you got rid of all the.
Inventory issues.
Have you started to see just second orders of transmitters from earlier adopters of the six seven DG and and what kind of a benefit has that has that had thus far.
As you think about.
2020 are going forward.
Yes.
Okay. Great question. This is Scott as head of the natural cycle that we've seen right. So if you go back to the five thirtyg into the 630 in the 670 typical transmitter will last two years and then you have that replacement. So is because we started to see patients ramp up on the 670 in the in early two.
Sales in 18, we're now seeing those replacement units.
And such.
A big chunk of frankly of what we're seeing today in terms of our topline revenue coming from transmitters.
We look forward into the.
The second half of the year and into 2021, we're excited about the seven seven UGI and the 70 BG platforms that we believe our corporate greed potential for Medtronic.
To begin to claw back some of the market share this lost over the last.
Several quarters.
Okay and just last question for me.
I remember, maybe we talked about this a year ago or so on one of the conference calls.
You are moving from a.
A manual and automated.
The process for for the sensors and that would have some sort of change at least on revenue I think that the net would be to same but the.
The growth strategy number would be a little bit different has that transition taking place yet having moved over to the automated system for sensor Assembly.
No we anticipate that will begin.
In short order and this will be blood and over probably a couple of years. Andy. So I think the initial impact was thought to be more significant than than what we believe it will be now so you will see thats other them.
At least over the next six probably quarters.
Okay wonderful. Thank you very much and best of luck going forward.
Thank you Andy Thank you.
I don't see any question at this time you may continue.
Thank you again for your time and continued interest in Intercon.
We have a great evening, thank you for drilling off.
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